House View, April 2020
- Our latest forecast is for global economy growth of -0.4% this year (compared with a previous GDP forecast of +2.5%). A persistent oil glut will continue to put downward pressure on the Brent oil price, before it drifts back to its equilibrium price of USD25 at year’s end. Our current central scenario is for US GDP growth of -2.1% in 2020 followed by a shallow recovery to +0.9% in 2021.
- Euro area authorities have reacted quickly to covid-19, although stimulus remains disunited and unevenly distributed. We expect a gradual recovery in H2 but have lowered our GDP growth forecast for the euro area to -2.5% this year with risks to the downside.
- The coronavirus damage to the Chinese economy is proving greater than expected. We have therefore revised down again our GDP forecast for 2020 to +1.2% before a rebound to +11.1% in 2021. We have also revised down our forecast for Japan, to -1.2% this year.
- By late March, the rush for US dollars provoked by market turmoil seemed to have been calmed by central bank action. We believe the US dollar’s recent surge is unsustainable, especially as the growth and rate differentials previously driving dollar strength have deteriorated. Although we could see further short-term spikes, we have a medium-term negative view of the greenback.
- We remain underweight equities although once visibility improves valuations should look attractive on a range of stocks. We see long-term winners emerging in sectors like healthcare, the internet and public infrastructure. We remain focused on cash-rich companies able to navigate the looming global recession. In fixed income, we believe peripheral euro area bonds will benefit from ECB measures, as will euro corporate credits (we favour high-quality, relatively short-duration corporate bonds).
- We maintain our overweight stance on liquidities, as well as on private equity and gold. We are also overweight the euro, Swiss franc and yen against the US dollar and see some hedge-fund strategies coming into their own. We reiterate our belief in active management at times like this.
- A near-term resurgence of Brexit uncertainties and further signs of economic weakness could lead to renewed pressure on sterling. Speculation around the currency will remain rife. The second half could see support for sterling grow, as long as Brexit-related issues are resolved.
- We expect volatility to remain elevated in developed equity markets, and therefore renewed downside risks. While our defensive bias and focus on structural growth have provided some relative protection, we have revised down our year-end target for the S&P 500 to 2900.
- Overall, we remain underweight EM equities, which are looking particularly exposed to the fallout from covid-19. We now have a year-end target of 950 for the MSCI EM index. Within the EM space, we continue to prefer North Asia, where the virus seems to have been brought under control.
- Tech stocks, especially big internet stocks, are now trading at low valuations despite a relatively resilient earnings outlook. Managed care and pharma companies have also been holding up well. Overall, a focus on quality growth remains appropriate.
- In hedge funds, we see a number of short-duration arbitrage opportunities and, more long term, a gradual layering in of directional risk could well sense. An upturn in defaults will provide opportunities in the credit space.
- The Fed’s massive intervention could help contain any strong rise in US Treasury yields (it may even be tempted by a form of yield curve control). ECB measures should help curb spreads on peripheral debt.
- We remain cautious on credit overall, remaining tightly focused on high-quality paper. While central banks are supporting investment-grade bonds, we expect to see a wave of fallen angels in the months ahead.