Commentary

Global markets one year on in the pandemic: Is the best yet to be?

For China, growth is projected to accelerate from 2.3 per cent last year to 8.4 per cent this year.PHOTO: REUTERS

SINGAPORE - A school in Singapore recently celebrated its 135th anniversary and the term "TBIYTB" was used on social media celebratory posts by both the alumni and current students.

The abbreviation stands for the school's motto, The Best Is Yet To Be. In many ways, it also describes the financial markets' remarkable turnaround 12 months after suffering the brunt of the Covid-19 pandemic this time last year.

The question is: Is the next 12 months the best that's yet to be for the market?

Plunged into bleakness

When the pandemic escalated in March last year, global equities took a huge hit as all major equity indices plunged.

The MSCI World Index fell 32 per cent to new lows in March last year as investors exited the market in rapid succession, fearing the global spread of the pandemic.

According to the MSCI World Value Index, value stocks took a major hit, declining 38 per cent, while growth stocks fell a smaller 26 per cent, as measured by the MSCI World Growth Index.

Many key sectors were severely impacted by lockdowns across the globe, and this included airlines, aerospace, tourism, retail, luxury items, hotels, and extending to banks and financial institutions.

Smaller-cap stocks were more vulnerable and fell a sharp 40 per cent, and larger-cap stocks fared better with a decline of 31 per cent.

Back then, in a rare and concerted effort, governments and central banks worldwide provided unprecedented liquidity to the market. As a result, equities rallied strongly as optimism returned despite rising Covid-19 cases globally.

By the end of March last year, the MSCI World Index was up 16 per cent from the low on March 23. And by the end of the following month, the index had recovered 28 per cent.

The remarkable turnaround picked up pace over the next few months and the index ended the year with a stellar gain of 14 per cent.

Growth outpaced value stocks

Gains were largely powered by growth stocks, with the Growth Index up 33 per cent for the year.

Extraordinary gains were seen for both small- and large-cap growth stocks. However, gains were not across the board, and the recovery was patchy and the impact uneven across sectors and markets.

Value and cyclical stocks were largely overlooked as persistent concerns remained over the pace of earnings recovery for these sectors and companies.

One year on

With several vaccines in the market and with more countries committed to rolling them out this year, the outlook is promising.

Global economic recovery is on track and global gross domestic product is projected to turn around from minus 3.5 per cent last year to 5.4 per cent this year and 4.2 per cent next year, based on consensus estimate from Bloomberg. The Asia ex-Japan region is projected to grow from 0.3 per cent last year to 5.1 per cent this year, and 5.0 per cent next year.

For China, which is the first country hit by the pandemic, growth is projected to accelerate from 2.3 per cent last year to 8.4 per cent this year.

A year ago, there were a total of 88,369 confirmed coronavirus cases on March 1.

A year later, on March 1, 114.4 million cases were recorded globally and the number of confirmed deaths stood at 2.54 million.

The United States reported 28.7 million cases, accounting for about 25 per cent of the total number of cases. This is followed by India with 11.1 million cases and Brazil with 10.6 million cases.

The pace of new daily cases, which peaked in February and March last year at a double-digit rate, has since tapered off to around 0.3 per cent on a daily basis.

With vaccines being rolled out, we are optimistic that economic activities will gradually return to pre-pandemic levels.

This will allow value and cyclical stocks to be well positioned to see a recovery in earnings, as well as renewed interest from investors looking for value opportunities in a persistently low interest rate environment.

Several sectors have largely underperformed in the last 12 months, and this includes aerospace and airlines, banks and financial institutions, energy, transportation and real estate.

The next lap

We are largely positive on the global economic recovery.

However, as equities have performed well last year, in contrast to the economic downturn, optimism for recovery has also been priced into most major equity indices.

The recovery and reopening themes have also led to concentrated focus on the digital, e-commerce and technology sectors - which were some of the key beneficiaries.

Recent earnings report cards have shown that companies have delivered better earnings.

Based on the S&P 500 of the companies that have reported earnings for the fourth quarter last year, 80 per cent beat analyst earnings per share estimates. This is a positive indicator and could mean that earnings revisions are likely.

The S&P 500, one of the oldest indices with data dating back to 1928, also show that the compounded average growth rate in the last 93 years was a decent 6.0 per cent.

History has also shown that over a longer period, equity is one of the better asset classes.

Going forward, we believe that a careful and balanced portfolio of value and growth stocks should be the way to ride out both the challenges and opportunities of the next 12 months.

• The writer is the head of OCBC investment research.