Global equities rallied in the first quarter of 2021 in part due to declining Covid-19 cases, progress in vaccine rollouts and sizable U.S. fiscal stimulus. Though the effect of rising bond yields weighed on equities during the latter half of the quarter, markets took solace in the better-than-expected economic indicators. In the Eurozone, business activity fell in January as companies continued to struggle amidst the ongoing pandemic and related restrictions. However, as global demand continued to revive, factories ramped up output in March and the flash manufacturing PMI strengthened. The UK witnessed a rapid recovery supported by a swift vaccine rollout and the flash composite PMI rose to a seven-month high. Developed markets outperformed emerging markets over the quarter. Crude oil prices rallied during the quarter supported by optimism around demand recovery. Among equities, value stocks outperformed growth stocks as investors piled in to cyclical sectors that were out of favor previously in the year.
The portfolio underperformed its benchmark in the first quarter of 2021. At a sector level, stock selection in consumer staples and financials detracted from performance, while stock selection in materials and an underweight to health care contributed to performance. At the region level, stock selection in Canada and continental Europe detracted from performance, while an underweight to the Pacific Rim was the sole contributor to performance.
While economic growth in the first half of 2021 will continue to be impeded by the pandemic, the latter part of the year should see significant upside in consumption as vaccines are rolled out globally and pent-up demand is unleashed. Accordingly, we see earnings for global corporations rebounding over this year to nearly their pre-pandemic levels. 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. While several expectations are priced in, historical experience shows that the potential for growth from a rebounding economy can often be underestimated. The pace of year-over-year inflation may stay elevated throughout the rest of the year and into 2022, reflecting the impact of surging demand and supply bottlenecks. Even though this could mean further increase in long-term interest rates in the months ahead, the portfolio manager believes it reflects confidence in the economic rebound which should prove to be a tailwind for equities.
Significant impacts on performance
The Dutch photolithography supplier to the semiconductor industry aided returns. The company reported positive fourth-quarter results, including better-than-expected margins and revenues. In addition, management raised guidance for its extreme ultraviolet lithography (EUV) machine. The stock was also buoyed as U.S. company Intel announced increased capital expenditure plans, from which ASML will benefit.
+ Anglo American
The U.K. mining company contributed to performance. Anglo American reported strong full-year results, showcasing a strong balance sheet and free cash flow generation amid a very positive environment for commodity prices. The company also benefited from investors moving to more economically sensitive areas of the market in response to rising expectations for growth this year.
The British multinational consumer goods company detracted from returns. While the company reported solid fourth-quarter results, its stock fell on the back of concerns about rising costs.
▬ London Stock Exchange Group
The stock exchange detracted as the company disappointed with its recent cost and revenue guidance. This left investors looking for more clarity on the integration of Refinitiv, which was recently acquired.