At GAM Investments’ latest Equities Meeting, held on 20 July, our managers shared their thoughts on the upcoming Tokyo Olympics and the potential effect of the current half-year earnings season on both European and global names.
Ernst Glanzmann - Japanese Equities
Several issues appear to be influencing investor sentiment towards the Japanese equity market at present. First, the start of the delayed Tokyo Olympics on 23 July is leading to caution from the government in terms of Covid-19-related restrictions. We expect restrictions to relax following the Games and this should be supportive for the market. Meanwhile, the vaccine rollout in Japan has continued accelerating since late May, which bodes well for the normalisation of domestic demand and the service sector in the second half of the year. Second, we will soon see another set of quarterly results released from corporates and, broadly, we expect announcements and forward-looking statements to be positive. Last, on the political front, a lower house election is scheduled to take place on or before 22 October. We expect a continuation of the status quo and political stability going forward, with the likelihood of another fiscal package later this year. Aside from this, it is also worth noting that many companies appear to be expanding and optimising factories plus increasing spending on IT upgrades and digitalisation.
Chris Sellers - European Equities
At the index level, European equities were up circa 14% in year-to-date terms until 13 July. The asset class had largely shrugged off the retrenchment in sovereign yields seen during much of the second quarter. However, over the last week there has been greater volatility and signs of a reduction in risk appetite. Results season is underway in Europe, and on average results have been excellent. We have seen positive pre-announcements from the likes of Kingspan and ASM International, as examples. Atlas Copco also posted an encouraging update with strength across the board in its industrial businesses. Overall, we believe conditions are supportive for equity investment, even if the risks of short-term turbulence have possibly increased a little. In Europe, the Covid-19 recovery remains at an earlier stage, the fiscal backdrop is supportive and the regulatory scrutiny of certain areas of the economy are not unfamiliar to European investors and are arguably more priced in.
Mark Hawtin - Global Equities
Risk assets are generally a little nervous at the moment, with all asset classes coming down, but no one single factor driving it. There is a sense that a correction is inevitable, yet interest rates remain low and significant liquidity remains – both factors usually being positive for equity markets.
That said, those equity markets are a little nervous as the half-year earnings season kicks off in earnest this week, with the majority of S&P 500 Index companies due to report over the next fortnight. Companies that have reported already have been met with mixed fortunes – UK-listed online retailer ASOS released adequate yet uninspiring results and the shares fell circa 18% – a disproportionate decline, one might think. We expect that ‘good enough’ earnings results probably won’t be and we do think there may be some short-term volatility.
Within our universe, we believe we could see more positive results from the two online advertisers, Facebook and Google. On the other hand, we are more cautious on short-term prospects for the software and semiconductor sectors. In-line results could meet with share price declines. We would remind investors that semiconductors remain highly sensitive to macro-economic growth, and given their recent strong performance, are good candidates for money managers to book profits and lower their portfolio beta.
We sense that money managers generally have more cash within portfolios than usual. So, an increased exposure to cash to guard against potential near-term volatility could provide a backstop to any potential correction, although at present, it is hard to see a major market direction as we approach summer and with Covid-19 cases rising once more.
Looking ahead to the medium-term, we remain very bullish on prospects for some specific Chinese companies. Heightened regulatory scrutiny (both data protection and antitrust) has negatively impacted some companies. However, we view policy clarification from the Chinese government as a strong positive given the attractive fundamentals of a number of stocks in this space.
The information in this document is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained in this document may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information. Past performance is no indicator of current or future trends. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice. Reference to a security is not a recommendation to buy or sell that security. The securities listed were selected from the universe of securities covered by the portfolio managers to assist the reader in better understanding the themes presented. The securities included are not necessarily held by any portfolio or represent any recommendations by the portfolio managers.