Global equities continued their strong run during the second quarter, supported by the vaccine rollout and further re-opening of economies from COVID-19 related restrictions. Even though concerns of higher interest rates and the more contagious delta strain of the novel coronavirus affected investor sentiment, markets took solace in the strong economic data releases and a robust quarterly earnings season. In the US, economic growth as measured by real GDP, accelerated during the first quarter. Private sector firms signaled an unprecedented expansion in business activity, as further easing of restrictions boosted new orders. In the Eurozone, business activity grew at a faster rate in the second quarter as economies continued to ease restrictions following improving vaccination rates. Additionally, the European Central Bank (ECB) expects inflation to remain below its target in the foreseeable future and therefore kept its policy unchanged. Crude oil prices rallied in view of the decline in US inventories, strong factory activity data from China and a recovery in demand from western economies. Among equities, investors preferred growth stocks over value, and developed markets outperformed emerging markets over the quarter.
The portfolio underperformed its benchmark in the second quarter of 2021. At a sector level, stock selection in consumer discretionary and financials detracted from performance, while stock selection in communication services and consumer staples contributed to performance. At the region level, stock selection in Canada and emerging markets detracted from performance, while an underweight to Japan and stock selection in the Pacific Rim contributed to performance.
A pickup in vaccination rates is fueling a reopening trend globally, with a surge in growth, reflecting pent-up demand from the pandemic and massive fiscal stimulus. Existing vaccines seem effective against the new COVID-19 variants as well, indicating that a broader recovery should continue across the major developed economies through the second half of 2021. Looking ahead, earnings growth should be strong in 2021, but could slow as profit margins come under pressure next year from higher wages, rising commodity prices and increasing corporate taxes. However, for now, a combination of booming demand and surging productivity continues to bolster profits. Cyclically geared markets, sectors and companies, which have been in the eye of the storm, are likely to benefit, but it is crucial to differentiate cyclical from structural headwinds and tailwinds as the recovery takes shape.
Significant impacts on performance
The German apparel company, contributed to returns. The company delivered solid quarterly results beating estimates on both revenue and net income. Management upgraded its sales guidance for the full year and also expected a significant acceleration fueled by an array of innovative product releases over the year..
The Swiss chemicals and biotechnology company, contributed to returns. The company announced that it will be expanding its API development and manufacturing site in China. Markets also reacted positively to the company’s partnership with Moderna, the American pharmaceutical and biotechnology company, to support production of COVID-19 vaccines.
▬ Canadian National Railway
The Canadian freight railway detracted from returns. The stock experienced volatility through the quarter as the bidding war for Kansas City Southern (KCS) gained momentum, then eventually came to an end when KCS decided to move forward with CN’s offer. Ongoing changes to the proposed deal continue to add to the stock’s decline.
▬ Sony Group
The Japanese technology, media and gaming company detracted from returns. The stock fell as investors sold off heavyweight Japanese technology stocks after the U.S. Federal Reserve signaled a rate hike earlier than expected, citing an improved outlook situation amid the vaccine rollout.