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.
We see a sustainable investing wave playing out in financial markets over the coming decades, remaking economies and industries as capital is reallocated to sustainable assets. This year’s fund flows may offer a miniature version of this shift. Sustainable exchange-traded funds (ETFs) have kept attracting assets this year, while traditional ETFs have seen heavy outflows in the market selloff.
Drastic market moves in recent weeks – triggered by fears of the coronavirus outbreak and its economic toll – have likely thrown many portfolios off their broad asset class benchmark weights. Sharp equity selloffs and government bond yield declines have mechanically turned many portfolios underweight equities and overweight bonds. We favor rebalancing toward benchmark weights, but recognize that timing and implementation will vary by investor.
The coronavirus outbreak is set to deliver a sharp and deep economic shock. Market moves are reminiscent of the 2008 crisis, but we don’t think this is a repeat. Stringent containment and social distancing policies will bring economic activity to a near standstill, but provided aggressive fiscal and monetary policy actions are taken to bridge businesses and households through the shock, activity should return rapidly with little permanent economic damage.
The coronavirus outbreak has continued to roil markets, even as significant monetary policy steps have been taken. Uncertainties related to the outbreak give public health officials a strong incentive to act aggressively to mitigate its human toll. These measures, though temporary in nature, slow economic activity, sometimes precipitously. We believe this will eventually set the scene for a strong rebound, but a decisive policy response is needed to safeguard fundamentals.