Market Insights – October 12, 2020

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Essentials

The Q3 earnings season kicks off this week in the US. The country’s economy has clearly picked up since the summer, and this should be reflected in corporate earnings. Although earnings are still down 20% compared with a year ago, we think there will be a number of positive surprises, which should push up the stock markets in the short term.

Eurozone retail sales bounced back in August, rising 4.4%. They are now above February’s pre-COVID levels. This fast turnaround can be attributed in part to the measures put in place to support jobs and forced saving among consumers in Q2.

The Chinese authorities have changed their reserve requirements in an effort to curb the yuan’s appreciation – it gained close to 1.5% last Friday. This move makes it cheaper to short the yuan. But the currency just recorded its sharpest quarterly rise (4%) against the US dollar in 12 years, so this decline could be short-lived.

 

On the right track

The global economy is picking up much faster than expected. The authorities responded quickly and decisively – in terms of both monetary policy and fiscal stimulus – to soften the economic blow when a large part of the global population went into lockdown for close to two months. In most developed countries, both the manufacturing sector and retail sales have improved. China, the first country to be affected by the pandemic, will probably record slightly positive growth this year, while the USA and Europe should return to growth next year. Some sectors are, however, still struggling as a result of the public-health crisis. That’s especially true for services, and particularly tourism and the hotel and restaurant industry, which won’t return to normal anytime soon. The world seems to be getting used to living with COVID-19.

When social distancing and other hygiene measures aren’t working, targeted decisions to temporary limit people’s freedoms seem to be enough to contain the pandemic. And while the virus is still spreading, death rates have dropped sharply since the spring. Progress has also been made in how patients are treated as we wait for one or more vaccines to become available, which experts say should be in the first half of 2021. Until then, central banks can keep their monetary policies extremely loose, although the question now is whether that will cause inflation to surge.  That would, in turn, lead to a rise in interest rates on long-term bonds. Bond markets offer only limited opportunities in this climate.  Among the major asset classes, equities offer the best prospects.

They may be slightly overpriced, especially in the US, but the global economic recovery should very quickly push corporate earnings back up. Investor optimism peaked over the summer, so in early September we made the tactical decision to briefly reduce our exposure to US equities. But the correction recorded in recent weeks has dampened investors’ enthusiasm. We have therefore upped our exposure to US equities again in our investment grids, but we’re also keeping in mind that the US presidential election and the pandemic could make the markets more volatile in the short term.

Emerging markets – opportunities should arise

The economic recovery has remained on the same atypical track it has been on since the start of the public-health crisis. Among other things, developed countries and emerging markets have become increasingly out of sync when it comes to manufacturing and consumer spending too. China’s economic recovery was initially driven by manufacturing as the ‘world’s factory’ worked to meet the surge in demand for medical and home office equipment. At the same time, consumer spending experienced a V-shaped recovery in developed countries, buoyed by the unprecedented stimulus measures put in place by central banks.

Now we just have to work out where the best opportunities lie. First of all, consumer spending is still lagging behind in China. Online shopping definitely came out on top during the lockdown, while more conventional services that require a physical presence – such as tourism and the restaurant industry – are finding it hard to get back to pre-lockdown levels. But these are the market segments that should offer the most upside. Thanks to China’s traditional holiday period in early October, domestic tourism is currently showing encouraging signs. There could also be opportunities in emerging markets outside Asia. Latin America has struggled to keep the pandemic under control, and that continues to weigh on both stock markets and local currencies.

Once again, these are the markets that should offer the most upside potential if there is good news in terms of infection rates or vaccine distribution. That would enable these countries to begin the process of returning to normal and mending their economies.

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