Global Strategy Q4 2020
After a solid economic and stock market recovery in Q3, uncertainty is growing again in Q4. Mounting concerns over the economic recovery in the face of an increase in new COVID-19 infections in some countries and political risks are leading to rising volatility in financial markets. Overall, we expect a sideways move in both safe assets and stock markets in Q4. Careful sector and stock selection is particularly important in this phase.
Economic Outlook: Political issues such as the U.S. presidential election, the approaching Brexit, and an increase in new COVID-19 infections should weigh on sentiment and the economy in the 4th quarter. The base case scenario for our forecasts is that the pandemic remains under control, and entire economies will therefore not have to be shut down, and that the above mentioned issues do not develop into permanent problems. In principle, after the massive economic slump in the 2nd quarter, economic data for the 3rd quarter released to date essentially point to strong growth. The recovery should continue in the 4th quarter, albeit at a much slower pace. In the US we expect GDP to fall by -4.3% this year, and in the euro zone by -7.6%. In view of the tense situation in the labor market and moderate energy prices, inflation should remain low.
Bonds: After both the US Federal Reserve and the ECB have provided comprehensive, targeted liquidity programs, we expect no change in monetary policy for the foreseeable future. Should economic conditions deteriorate, both central banks would respond with additional measures. The ECB could expand the PEPP purchasing program if the economy weakens, or cut interest rates in the event of a continued rapid appreciation of the euro. The Fed would react with larger securities purchases. Amid the conflicting interplay between political risks and central bank purchases on the one hand, and the continuation of the economic recovery on the other, government bond markets will tend to move sideways. In corporate bonds we continue to recommend hybrid bonds from the IG segment as well as BB-rated issues from defensive sectors with relatively stable cash flows.
Currencies: Foreign exchange markets are currently waiting to see how political risks (US presidential election, Brexit) and economic uncertainty due to rising new COVID-19 infections evolve. As a result sideways moves in EURUSD and EURCHF should be expected for the time being. Gold is a beneficiary of uncertainty, higher stock market volatility and low government bond yields. We expect a moderate gain in the gold price in the 4th quarter.
Equities: We expect the global stock market to move sideways in the 4th quarter and post only a small positive return in a range from 0% to +5%. In the near term the correction in technology stocks, which is not fully completed yet, should lead to increased volatility, which could subsequently be sustained by possibly long-lasting uncertainty over the outcome of the US presidential election. The risk to this forecast would consist of weaker economic growth momentum and lower earnings expectations due to a significant tightening of COVID-19-related restrictions.