Economic Week In Review
• Nine of the eleven GICS sectors ended in positive territory as better-than-expected earnings and a healthy manufacturing PMI helped outweigh concerns. Growth and tech names largely outperformed value and cyclicals, while small caps and large caps performed mostly in line.
• Monday’s losses were all but erased by Wednesday as investors found comfort in the lack of headlines pertaining to an expansion of economic restrictions. Company comments indicating the rise in Delta variant cases has not adversely impacted businesses also provided a ballast for equities.
Risks To Our Outlook
Global equity markets proved last week just how volatile they can be as a result of spiking Covid-19 data. We expect markets to remain highly susceptible to pullbacks as governments continue to deal with new variants. The reinforcement of economic restrictions will almost certainly lead to a slowdown in global growth.
Economic forecasting remains a challenge, and with decelerating growth taking center stage, we suspect equity markets may react poorly to economic data that miss consensus expectations.
Though rate hikes are still likely far in the future and a flattening yield curve will hinder industries such as financials that are more sensitive to interest rate momentum, we suspect inflationary pressures may return as drivers including wage inflation may create more permanent effects.
Any disruptions in the legislative process toward infrastructure stimulus could spark additional bouts of volatility.
Best Ideas
We see opportunities in developed non-U.S. markets, particularly in Europe, which appears relatively inexpensive and should benefit from improved vaccination rates, solid earnings growth and a more cyclically oriented economy. In the U.S., reflation and expectations for higher yields could bolster returns for small caps, while select industrial companies should benefit from still-improving economic growth. We are also bullish on emerging markets, specifically Brazil and areas such as China’s lodging and gaming sectors, which stand to benefit from easing travel restrictions.
In Focus: Staples: Playing Defense During Volatility
The consumer staples sector has largely lived up to its reputation in the Covid-19 era, providing defensive positioning during the most volatile periods, while lagging peers during the recovery in equity markets. This trend was highlighted again last week.
It should be noted, however, that the sector experienced a dichotomy of winners and losers as a result of economic restrictions: Manufacturers of household and personal care items struggled to keep up with demand as a hoarding mentality struck consumers in 2020, while leadership shifted to food suppliers and beverage producers thanks to consumers returning (with a vengeance) to restaurants and outdoor venues.
In the current environment, consumer staples may offer investors an opportunity for less volatility, not to mention a degree of protection against inflationary pressures thanks to pricing power. The sector also appears attractive from a relative valuation perspective, sitting at a roughly 5% premium to its five-year historical P/E average versus a nearly 20% premium for the broader equity market.
Looking forward, we believe non-U.S. markets provide some of the most attractive investment opportunities within consumer staples, particularly in Europe. In addition to Europe being among the most ESG-conscious, it is also home to some of the most iconic brands within personal care and distilled spirits; industries with strong ties to two of the world’s biggest consumer markets: China and the United States.
Saira Malik is head of global equities at Nuveen.