Global Strategy Q3 2020
The easing of COVID-19 containment measures has laid the foundation for a gradual economic recovery after the severe slump in the second quarter. Hopes for a rapid recovery in the coming year and the massive injection of liquidity by central banks are benefiting riskier investments, particularly as yields on safe assets should remain depressed for a long time to come. Continued high uncertainty and the Q2 reporting season suggest that periods of heightened market volatility are likely to occur in coming weeks as well.
Economy: While there are signs that the COVID-19 pandemic is easing in Europe, infection rates in other parts of the world are not yet under control. That said, a number of leading indicators are already pointing to a gradual improvement of the global economy. In the US new infections have stabilized, albeit at high levels. Nevertheless, The containment measures were eased in May and initial economic data reflect the beginning of a recovery. It is open to question how quickly the economy can return to the path of recovery after the slump in Q2. In the euro zone the negative economic impact was characterized by large differences on the country level. For 2020 as a whole, we expect euro zone GDP to contract by -7.1%, followed by a recovery in 2021 (+5.4%). This forecast is based on the assumption that future infection outbreaks will be contained regionally and that it will therefore no longer be necessary to shut down entire economies.
Bonds: Both the Fed and the ECB have provided extensive, targeted liquidity programs and are doing everything in their power to ensure the availability of financing for households and companies at favorable terms. Although the expected economic recovery in the second half of the year should generate upward pressure on government bond yields, it should be offset by central bank asset purchases and muted interest rate expectations. Should certain risks materialize, such as a sharp increase in COVID-19 infection rates or an escalation of political conflicts (e.g. Brexit, US/China), at least a temporary decline in yields should ensue. In the corporate bond sector we continue to recommend hybrid bonds from the IG segment as well as BB-rated bonds from issuers in defensive sectors with relatively stable cash flows.
Currencies: The easing of the COVID-19 pandemic has alleviated upward pressure on the US dollar and the Swiss franc. As the economic recovery in the euro zone progresses, we expect the euro to strengthen further against both the Swiss franc and the US dollar. The price of gold should benefit from low government bond yields and heightened stock market volatility.
Equities: The fiscal stimulus packages of governments, supportive central bank policies and the expected economic recovery in 2021 should continue to lend support to equity markets. The technology, healthcare and non-cyclical consumer sectors should outperform the broad market in the third quarter. Risks for global stock markets would arise if the second quarter earnings season were to disappoint or if an increase in new COVID-19 infections were to result in the imposition of stricter containment measures.