The COVID-19 shock is accelerating structural trends in inequality, globalization, macro policy and sustainability. This is fundamentally reshaping the investment landscape and will be key to investor outcomes.
Europe’s policy response to the virus shock was slow to get going – but an impressive array of fiscal and monetary measures is getting into place to bridge the economy through the shock.
Public markets were at the center of market action as risk assets sold off amid the spreading pandemic and then rebounded amid an overwhelming policy response.
Macroeconomic policy has gone through a needed revolution to cushion the coronavirus shock. It essentially aims to “go direct” and is blurring fiscal and monetary policies.
China’s economy – the first to enter lockdowns and the first to emerge from them – is restarting. We see the economy likely returning to near-trend growth by late 2020, supported by policy stimulus, especially on the monetary front.
The coronavirus shock is reinforcing structural trends and introducing new ones, such as the policy revolution, surging sustainability wave and accelerating deglobalization. In many ways, the future is arriving fast.
Global stocks have recovered more than half of the selloff triggered by the coronavirus pandemic since late March – alongside a sharp contraction in economic activity and corporate earnings.
A decision by the German constitutional court last week could potentially undermine the independence of the European Central Bank (ECB) – and threaten to fuel fragmentation within the euro area in the long run.
Global economic activity is being frozen to stem the coronavirus pandemic. Yet implications for asset prices will depend on the cumulative impact of the growth shortfall over time.
We have turned more cautious on emerging market (EM) local debt despite depressed valuations after recent selloffs. Some EMs have allowed their currencies to weaken to help absorb the economic shock, and we see a risk of further currency declines in selected EMs that could wipe out coupon income. We are still overweight equities and credit in Asia ex-Japan, with China gradually restarting its economy and readying more policy support.
We see U.S. stocks outperforming their developed market (DM) peers over the next six to 12 months. The overall U.S. policy response to the coronavirus shock has been decisive and comprehensive, already exceeding the scale of policy action in other major developed economies. We expect there is more to come. The U.S. stock market also has a relatively high concentration of quality companies with the capacity to weather the storm, in our view.
Unprecedented policy actions to limit the coronavirus shock and sharply lower valuations have improved the outlook for credit, in our view. Major central banks are committed to keep rates low and greatly expand their balance sheets. This underpins demand for corporate bonds and selected sovereign credit. We upgrade our view on global investment grade credit to a moderate overweight from underweight and keep high yield as an overweight.