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Global Market Perspective - Q3 2020

After Covid-19 sparked a sharp sell-off in markets at the start of the year, risk assets have rebounded strongly in the second quarter. The lifting in lockdown measures combined with considerable policy support worldwide have led to a robust rally in global equities. In particular, the European stock markets have delivered strong gains driven by a significant policy response from the European authorities.

Despite renewed trade tensions between the US and China, emerging market equity was one of the strongest performers alongside a softer US dollar and recovery in commodity prices. After suffering the worst quarter in history, the sharp rise in the oil price on the back of greater optimism on the global economy has meant that it had the best quarter on record. Against this backdrop, bonds were mixed with credit and emerging market sovereign bonds recording positive gains, but government bond returns moving side-ways.

We have downgraded our 2020 global growth forecast further given the weakness seen in the first quarter. With the lockdowns extended through April and into May, we expect activity will have been hit even harder in the second quarter.

As we enter the third quarter, there should be a bounce in activity with the easing of lockdown restrictions, albeit to a lesser extent than we had previously anticipated. In terms of the likelihood of risks to our central view, we see the W-shape recovery as the greatest concern. This involves the return of the virus later in the year leading to a second wave of lockdowns such that there is a double-dip of global activity.

From an asset allocation perspective, we continue to prefer credit given the substantial liquidity provisions by the Federal Reserve (Fed). Policy intervention has also dampened the tail risks from Covid-19, which has led us to neutralise our underweight in equities. Moreover, we have added cyclical exposure through the European market and US small caps. However, we continue to have a bias towards quality equities, as we do not expect a quick return to economic normality.

Meanwhile, sovereign bonds continue to offer little value relative to equities. We also believe their ability to provide a hedge in the portfolio is deteriorating. Nevertheless, the unprecedented level of monetary accommodation by the central banks mean that we are neutral on duration. Instead, we continue to own gold to balance the cyclical risk in the portfolio.

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