After the pandemic shock, the S&P 500 rallied through the summer and has now recovered its losses. For the globally diversified investor, however, not all markets are similarly back in black.
“When we look at markets across the world and ex-U.S., there are some areas that have been doing better than the others,” said Amber Sinha, senior portfolio manager for global equities at CIBC Global Asset Management, in a late-August interview.
For example, the MSCI AC Asia Pacific index had gross returns of about 3% year to date as of Aug. 31, while the MSCI Europe index was down more than 5%. Taking local currency into account, the performance gap between the two markets was about 12%, Sinha said.
Part of the reason for the differential was Covid-19’s trajectory.
“Asia was the first in, first out of the global pandemic,” said Sinha, who manages the CIBC European Equity Fund and CIBC Asia Pacific Fund.
As a result, economic activity in the region was restored earlier. China, for example, had already made up its decline in GDP in the second quarter.
Another reason for Asia’s outperformance was tech, which was also a factor in the S&P’s recovery. The pandemic helped accelerate e-commerce and digital services, which benefited tech and internet stocks.
“We have some very large technology companies in China [and] in Asia in general,” Sinha said, noting that the U.S. isn’t the only tech heavyweight. He cited Tencent, Alibaba and a “few more hundred-billion market cap companies” that are less well-known.
“These stocks have certainly done well in an environment where technology continues to outperform the market,” he said.
In contrast, Europe is relatively underrepresented in tech based on market capitalization.
“As a result, we’ve seen more of a muted recovery in the European stock markets,” Sinha said.
Global market risks
The uneven rebound in global markets represents an ongoing risk.
With some markets performing better than the others, Sinha suggested investors assess the market rebound versus the economic one.
“We cannot make the mistake of getting too optimistic based on share prices, when the situation on the ground doesn’t warrant that,” he said.
Such optimism is a real risk in the U.S., and it’s also a risk for European and Asian markets, he said.
The best-performing major market since the lows of the pandemic’s shock is the China CSI 300, and it’s up about 15% year to date.
With that strong rebound being limited to Chinese tech and internet stocks, the market could have more room to run. But continued performance depends on economic expansion.
For example, China’s general industrial consumer space could recover if the pandemic doesn’t surge again, Sinha said.
Further, “If the recovery in Chinese GDP continues, I’m sure there are other sectors that will, in the future, contribute to the Chinese stock market performance,” Sinha said.
In an outlook report on Friday, Desjardins forecast China’s economy to grow by 1.1% this year and almost 8% in 2021.
A Covid-19 resurgence remains a risk for markets, however, and would have implications for portfolio allocations.
For example, “If there is a resurgence in Asia, more than in Europe, then certainly there should be some changes made to any portfolio allocation,” Sinha said.
Another risk is China-U.S. tensions.
“There certainly seems to be a lot of noise around the China-U.S. relationship,” Sinha said, citing tensions involving trade, intellectual property and Chinese listings in U.S. markets.
“That’s something that certainly should be kept in mind when venturing outside the U.S. stock markets,” he said.
This article is part of the AdvisorToGo program, powered by CIBC. It was written without input from the sponsor.