The macroeconomic environment is gradually returning to normal and the V-shaped recovery of the major economies remains our baseline scenario. Depending on the further path of the corona crisis, the reopening process may slow down in local and isolated cases, but the direction is already set in our view. The whole process can be seen as two steps forward and one step back. The latest US purchasing managers’ survey data (PMI) confirms this trend not only in the services sector but also in the heavily battered industrial sector. The PMI figures recently were well above the important threshold of 50 points and have also exceeded market expectations. Similar signals have also been observed in Europe. On this backdrop, we are sticking to our constructive assessment of the global economy, but expect the recovery to take time until the end of 2021, or even 2022, before global output reaches the level before the corona pandemic in absolute terms.
Since the American consumer is not only of central importance for the US GDP, but also contributes between 15-20% of the global economic output, his ability and willingness to consume is always an important factor for capital markets. Now that the US government’s first fiscal package has expired, US private households could face a so-called “fiscal cliff“. Without further government support, consumers will have less money in their wallets to consume. This could endanger the anticipated V-shaped recovery in the world’s largest economy. Politicians in Washington have been debating for weeks about the extend of the next corona aid package. From our point of view, the question is not if, but only when and how large this package will be, as the United States are in the midst of an election campaign and congressmen and above all the incumbent US President Trump want to win voters with large cash gifts. It is quite conceivable that Washington will support the ailing economy with another USD 1.5 trillion, providing more than USD 2 trillion.
The enormously expansive monetary policy of the global central banks and the extensive fiscal packages of the world’s most important economies are not the only pillars that should support an anticipated V-shaped recovery of the global economy, but also serve as enormous support for financial markets. Besides the liquidity and high cash levels, which also have remained elevated in the latest survey of fund managers, there is an enormous amount of money about USD 5 trillion parked in the money market in the short term. Looking at this, we can indeed speak of an investment crisis which applies to all asset classes. For example, the credit risk premiums for corporate bonds have returned to the level they were at before the outbreak of the corona crisis. In our view, this situation is unlikely to change in the coming quarters.
We are aware that this year is, and will be, a very special one because of the corona crisis and comparisons with the past should always be treated with caution. Nevertheless, we are in the annual phase where the so-called seasonality is not on the equity bulls' side. In the past, September and October tended to be more turbulent than other periods, as during these periods companies not only had to account for the third quarter and the outlook for the fourth quarter, but also deliver an outlook for the following year. Therefore, we anticipate volatility on capital markets to increase in the coming weeks.
The setup outlined above, taking into account a V-shaped economic recovery and additional stimulus, will keep markets in a classic “buy-the-dip“ mode not only for stocks, but for most asset classes. The seasonality, but also the US elections and the continued tensions in the trade conflict between the US and China, will most likely increase volatility.
On this backdrop, we continue to favor equities over fixed income due to the equity risk premium, but we believe that the most important and decisive success factor remains selection.
Publisher: LGT Bank (Switzerland) Ltd., Glärnischstrasse 36, CH-8027 Zurich
Author: Thomas Wille, Head Research & Strategy, Email: firstname.lastname@example.org
Editor: Alessandro Fezzi, E-Mail: email@example.com
Source: LGT Bank (Switzerland) Ltd.
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