How relevant has Covid-19 been for the financial markets? This is the starting question posed by Tina Fong, strategist of Schroders, in analyzing the markets more than 18 months after the spread of Covid in China and then in the rest of the world. From the beginning of 2020 onwards, with the rapid spread of the coronavirus and the restrictions that followed, the effects on life and the repercussions on the global economy have been strong.
The impact on financial markets, according to Tina Fong, is less clear. First, equities appear to have outgrown the aftermath of the virus: after the initial sell-off, global equities (based on the MSCI AC World Index) generated a 15% return in 2020. “The markets have certainly been supported by the massive fiscal and monetary stimulus adopted around the world. However, looking deeper, the virus appears to have played an important role in establishing the fortune of certain sectors and styles in the equity universe, ”explains the Schroders strategist.
Secondly, investing in certain countries based on their pandemic management and vaccination campaign was complex. In general, it seems that the countries that have seen an increase in growth expectations are the same that have distinguished themselves in the vaccine race. “However, this has not led to higher equity returns in these markets: the relationship between the vaccination rate and growth expectations seems to have worked more in the currency markets,” adds the expert.
Over the past decade, with the rise of the tech sector, growth stocks have outperformed value stocks. However, the difference between the returns of these two domains was stark in 2020, with the MSCI AC World Growth Index exceeding the equivalent value index by 33%.
“Growth sectors such as tech and consumer discretionary have had double-digit returns. The technology sector has not only benefited from remote work, but both sectors have also been supported by the sharp decline in government bond yields – underlines Fong -. At the opposite, the most economically sensitive and value-oriented sectors, such as energy and finance, suffered losses. In particular, the energy sector had the worst annual performance since the global financial crisis “
Despite that, the outlook for value stocks improved in early 2021. The arrival of vaccines, a larger-than-expected tax package in the US, and the decline in new Covid cases have led to a resurgence in value. The situation has turned around again in recent months as, despite the rally in global equities and earnings growth in the value sectors, investors have turned to the growth world.. The Delta variant has also led to a third wave in countries with a high rate of vaccinations, sparking new concerns about global recovery.
According to Schroders, as long as Covid impacts bond yields and delays the reopening of the economy, the context will remain challenging for the value style and related sectors.
What rewarded investors last year was an allocation based on a specific style, rather than the decision to invest in a given country on the basis of its efficiency in managing the pandemic. Equity indices heavily exposed to tech and growth sectors, such as the US and South Korea, performed best. Despite having a number of confirmed cases of Covid-19 among the highest in the world, explains the expert, the United States with the S&P 500 has far outperformed the rest of the developed markets. Conversely, markets most exposed to value sectors, such as Europe and Australia, have lagged, despite Australia being among the countries that have best managed the pandemic.
In general, therefore: “iCovid-19 was more relevant to some markets than others, such as the value style and related sectors. At the same time, the success of the vaccination campaign in different countries has been more important for currencies than for stock markets. It is worth remembering that the Delta variant and the emergence of new variants could still represent a downside risk for the economy and the markets ”.