August 2021 was a very good month for many asset classes. Equities in general did very well, as the S&P 500 surpassed the 4,500 mark at the end of last week. This was largely backed by surge in technology-driven stocks that have done very well since the crisis began and do not seem to slow down. There also was a substantial rebound from the continuous selloff of Chinese stocks, in particular tech stocks, as for example Alibaba surged 9% in a single day. Similarly, hedge funds also had a strong July and saw continued inflows since May 2021 during which period the AuM increased significantly to $4.32tn. Aside from inflows, the AuM was also boosted by the good performance of hedge funds, as our SMC Single Manager Cross-Asset Index is up 5.4% in July 2021. These gains largely stem from tactical trading and cryptocurrency-based strategies, while only equity strategies were down slightly. The best strategies in July focused largely on cryptocurrencies that have recovered well from their severe drop a couple of months ago. The market cap of cryptocurrencies just surpassed the $2tn mark again, largely due to the surge of altcoins. Bitcoin (BTC) is relatively low with $48k at the time of writing. Ethereum (ETH) is a lot higher, but also quite far away from its peak with being worth $3,200 currently. Other altcoins like Cardano (ADA), the now third-largest cryptocurrency, have surpassed their previous records by almost 50% already and continue to reduce the dominance of BTC and ETH. Gold, and other precious metals, that suffered in 2021 so far, have seen an upward trend over the last weeks, but they remain at relatively low levels.
The macroeconomic environment will largely drive the market in H2 2021, which itself is based on significant degree how Covid-19 will evolve in the near future. With regards to the pandemic, the key questions are how the number of vaccinations evolve going forward, in particular as developed economies no longer have shortages of vaccines, but rather a declining number of people that want to get vaccinated. A crucial point is whether herd immunity can be achieved, either by being vaccinated or having had the virus. Another important point is how long the vaccine will last, as the cases of vaccinated people contracting the virus rises. Luckily, the symptoms seem to be minor. Probably even more important is whether new strains of the virus emerge that completely bypass vaccinations and essentially setting the world back to March 2020. The latter scenario seems less likely but should be considered to some degree. In a non-negative scenario, US inflation is likely to drop towards the end of the year with expectations around 3%. For the next years, it is expected that US inflation will remain between 2% and 3%, following the change in the FED’s inflation target of being 2% in the long-term instead of capping inflation at 2%. Thus, it is unlikely that inflation will drop below 2% for quite some time. In the EU, the inflation outlook is lower compared to the US, as the ECB expects inflation to rise to around 2.6% in Q4 2021. In 2022 and 2023, inflation is expected to remain around 1.5%. Furthermore, the FED and ECB also hinted at possibly putting more emphasis on employment instead of inflation going forward. This suggests gold being well positioned in the current market. As of July 2021, gold is almost back at its average in 2021 of $1800 per ounce. Despite being at a relatively high level historically, gold seems attractive with surging inflation and short-term interest rates being very close to 0%. Yet gold’s record high of more than $2000 per ounce lies back almost a year, at a point in which inflation was at 1% and not a concern for many. Since May 2021, inflows in gold ETFs are positive again albeit a bit sluggish. This is remarkable as previously, there were mostly only net outflows. Currently, the global gold AuM is at $214bn. Equities, in particular in the US, have experienced a great 2021, as shown in Figure 1. The S&P 500 is trading very close to its record high of around 4,450. During 2021, expectations for the S&P 500 level were adjusted multiple times. At the end of 2020, when the S&P 500 was 3,700, moderate expectations were around 3,900, while optimistic scenarios targeted 4,300. Yet, all those expectations were already surpassed in the low-interest rate environment, monetary stimulus and increased corporate earnings due to the recovery of the economy. Goldman Sachs has updated its target for the S&P 500 to 4,700 at the end of 2021. Contrarily, Chinese tech companies have suffered in July with the worst month since the financial crisis in 2008. Investors feared the crackdown of Chinese regulators on tech companies. Figure 2 shows valuations of Chinese companies listed in Hong Kong and in the US. Not only, are Chinese tech companies strongly undervalued compared to US tech stocks. Furthermore, Chinese tech companies listed in the US are even stronger undervalued, as very few even reach a multiple of 5, as shown in Figure 2.