Downbeat economic news and rising COVID-19 case numbers have weighed on market sentiment. We remain positive on the prospects for equities in the medium term. If, as polls currently suggest, the Democrats win both the US presidency and control of the US Senate on 3 November, reflationary fiscal stimulus may be one consequence.
The number of new COVID-19 cases continues to rise at an alarming pace across Europe. Governments are responding with an array of measures, but stopping short of renewed lockdowns. In the Netherlands, where COVID-19 case numbers have doubled in the last fortnight, the government has announced a partial lockdown. Cafes, bars and restaurants are to be shut for at least four weeks. The consequences of this will be assessed after two weeks. If the government considers insufficient progress has been made, a total lockdown may follow.
In France, President Macron is expected to announce a tightening of restrictions this evening, although the government is said to be doing everything to avoid a second lockdown.
Germany’s leading public health body, the Robert Koch Institute, has warned the virus could start spreading uncontrollably after a significant rise in the number of new infections (4,122 yesterday) to levels not seen since April.
In the UK, the number of COVID-19 related hospitalisations has also risen sharply, but as elsewhere in Europe, the number of deaths from COVID-19 remains far below earlier levels. Among hospitalised patients, the number on ventilators is also much lower than during the spring.
Finally, safety concerns promoted two US pharmaceutical companies to halt trials of experimental COVID-19 drugs. This represents a setback for hopes of a rapid medical intervention to control the pandemic.
Yesterday, the International Monetary Fund published its twice-yearly World Economic Outlook. The IMF expects the period of recovery from the crisis to be ‘long, uneven and uncertain.’
Global economic growth will be negative this year and the worst since the Great Depression of the 1930s, said the IMF. The downbeat prognosis came despite an upward revision to the IMF’s growth forecasts for 2020. This is because the second quarter recession proved shallower than feared with countries recovering faster than expected as lockdowns were relaxed. The IMF now foresees a 4.4% contraction of the global economy in 2020, compared to -5.2% in June.
The latest monthly ZEW survey of investors’ economic sentiment showed a sharp fall to 56.1 (its lowest since May) from 77.4 last month. This was a bigger fall than expected, according to the ZEW president. It is explained by “the recent sharp rise in COVID-19 cases, which has increased uncertainty over future economic development, as had the prospect of the UK leaving the EU without a trade deal.”
In the US, negotiations between Democrats and Republicans over fiscal stimulus continue. At times, investors have struggled to keep up with developments. After announcing on 6 October that he was shelving talks, President Trump quickly reversed and called for legislation to aid certain sectors. Yesterday, Nancy Pelosi, the Democratic speaker of the House, said that ‘significant changes’ must be made to the president’s proposed fiscal stimulus package.
Agreement on fiscal stimulus remains a critical topic in the US because there is a broad consensus that the Federal Reserve’s (Fed) newly announced framework for monetary policy cannot succeed without fiscal support from the US government. Fed official continue to labour this point.
Ensuring that the economic recovery remains on track will require political will elsewhere. Germany, for example, faces a federal election next year which may have implications for public spending. There are also concerns over a delay to the European Union’s recovery fund to support pandemic relief measures. Negotiations are underway this week over how to ensure the money is properly spent.
With less than three weeks to go before the US presidential elections on 3 November, former Vice-President Joe Biden’s lead over Donald Trump in polls of polls reached 10 percentage points for the first time this week.
There is still time for the race to change dramatically, but without a meaningful shift in public opinion, a clean sweep with Joe Biden in the White House and Democrats controlling both the House and Senate (known as a blue wave) looks likely. Financial markets see the prospect of significant additional fiscal stimulus in the event of a Democratic sweep. Five-year, five-year forward US Treasury inflation expectation rates have risen steadily over the last few weeks, in anticipation of fiscal stimulus and reflation.
Joe Biden’s standing in the polls began rising on 30 September after the presidential debate. Since then the S&P 500 has risen by 4.2%, but renewable energy and managed healthcare have done much better, while the FAANGs, pharmaceuticals, energy and in particular coal have underperformed. The underperformance of the energy sector is notable as oil prices have risen by 4.4% over this period (see Exhibit 1 below).
Exhibit 1: Returns of selected industry sectors relative to US S&P 500 index from 29 September 2020
Source: BNP Paribas Asset Management as of 09/10/2020
Last week, global equities rallied – the MSCI AC World index in US dollar terms rose by 3.6% to its highest since early September. Emerging market equities slightly outperformed their developed market peers. In the US, the S&P 500 rallied by 3.8% over the week and the EuroSTOXX index ended the week up by just under 3%.
The rally in equity markets paused yesterday as the IMF’s bleak forecast and news of the setbacks in coronavirus vaccine trials weighed on sentiment.
We continue to have a positive view on the prospects for equities over the medium term. The economic recovery is underway and global liquidity remains abundant. Fundamentally, low real interest rates continue to boost valuations and facilitate fiscal expansion. There is room to rotate from low-yielding bonds or cash into equities.
Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice.
The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.
Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions).Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.