In June, equity markets in developed countries continued to perform strongly, posting gains of almost 5% in EUR. The US markets were the driving force behind this increase, with nearly 6% of performance at the end of the month vs. just 1,5% in Europe. This difference in geographical performance is also reflected in sector performances. The technology sector recovered significantly (+10,6%) after having lagged somewhat since the beginning of 2021 compared to more cyclical sectors such as energy and financials.
It is worth noting that cyclical sectors have benefited greatly from the exit from recession and from an economic recovery whichhas received a substantial boost from industrial production.
Currently, the success of the vaccination campaigns and the reopening of the services sector (the principal growth driver in developed countries during the pre-Covid period) suggest that consumption habits and the economy are beginning to return to normal. The strong cyclicality observed since the start of the year seems to be dissipating.
Even though it is difficult to be certain that we will see a sector rotation from value to growth for the moment, market movements and economic indicators are pointing in that direction.
Rates on bond markets also back up this argument. The upward movement on long-term rates that began in August 2020 has been on hold since March. By way of example, the 10-year US bond yield dropped from 1,74% at the end of March to 1,46% by the end of June. This environment of low yields makes growth sectors, such as technology, more attractive.
In summary, market movements show that investors continue to believe that current inflation levels will be temporary, as the US Federal Reserve (Fed) and the European Central Bank (ECB) insist. The downturn in long-term rates and the good short-term performance of growth stocks are evidence that markets are aligning with the view of central banks.
To sum things up, our overall allocation choice remains unchanged: we continue to prefer equities to bonds. However, we are making a few adjustments to our tactical positioning: we are reducing our exposure to cyclical sectors in order to bring a growth bias to our portfolios. In addition to the macroeconomic and associated interest rate environment, the outperformance of growth relative to value sectors is well-established.
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