In focus

Global Market Perspective - Q2 2020


The S&P 500 recorded its worst quarter since the last global financial crisis (GFC) as risk assets gave up most of their 2019 gains.

The equity markets initially made a promising start to the year on the back of better macro data and the prospect of reduced geopolitical headwinds, particularly on the US-China trade front.

However, the spread of Covid-19 and potential negative impact on the global economy and corporate earnings triggered stock markets to tumble across the world, with the S&P 500 experiencing the third-largest daily fall in its history.

Meanwhile, the prospect of weaker global demand due to coronavirus and the increase in supply from OPEC oil-producing countries caused the oil price to suffer its worst quarter in history.

In stark contrast, aggressive monetary policy stimuli from policymakers around the world boosted safe haven assets such as government bonds and gold.

With the Federal Reserve (Fed) returning to quantitative easing (QE), US Treasuries had their best quarter since the GFC.

Looking further into 2020, Covid-19 looks to have plunged the global economy into a severe recession such that it could be the worst year for growth since the 1930s.

We expect there to be a significant hit to activity in Q2 as the major economies experience the impact of lockdowns and restrictions on population movements.

By Q3, we assume that economic normality resumes with monetary and fiscal policy actions enabling a strong rebound in growth.

However, the risk to our central view is that the coronavirus lingers and the return of the infection leads to a second wave of lockdowns such that there is a double-dip of global activity.

In terms of asset allocation, the substantial liquidity provisions by the Fed has led us to add back to investment grade debt as valuations look compelling.

However, we are underweight equities as they have yet to process the significant fallout caused by the coronavirus on corporate earnings.

Within the asset class, we prefer emerging equities relative to the US as valuations look attractive and they are also the beneficiaries of looser US dollar liquidity.

Meanwhile, sovereign bonds continue to offer little value relative to equities, but they do provide a hedge in the portfolio against a more deflationary outcome.

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