House View, July 2020
We remain slightly underweight equities as, although expectations for second-quarter earnings are low, there is room for disappointment. That said, ECB support and the prospect of an EU recovery fund gives us optimism for Euro area assets, including equities.
Investor enthusiasm for high yield will be challenged by rising defaults, particularly in the US, although the credit market is well supported by central banks. We have revised down our year-end forecast for 10-year US Treasury to 1.1%.
We believe the dollar could lose ground against the euro in the months ahead although the euro is vulnerable against a background of difficult post-Brexit negotiations with the UK. We are more concerned about sterling's near- and medium-term prospects, particularly given the risk of additional monetary easing in the UK. We maintain our overweight stance on gold.
Mobility data shows that attendance in public spaces has resumed faster in advanced economies than in emerging ones, with Europe in the forefront. New covid-19 cases are accelerating again in the US, particularly in southern states.
We retain our euro area GDP forecast for 2020 at -9.5% (+4.5% in 2021), with risks broadly balanced to the upside and the downside. The UK is suffering from a comparatively long shutdown. In spite of brinkmanship, we believe that UK will reach a basic trade deal with the EU, details of which should emerge only in November.
Given the recent pickup in coronavirus cases, we remain prudent on the outlook for the US. With emergency help for households due to end in July, we are especially prudent on consumer spending. Our central GDP forecast for the US remains at -7.7% in 2020.
We have revised upwards our end-year forecast for Brent to USD40 per barrel, although upside potential looks limited as current prices are an incentive for US shale oil production to resume and OPEC+ members to pump more than their agreed quotas.
As the economic consequences of the health crisis becomes more apparent, currencies will likely once again exhibit more sensitivity to macro drivers than to global risk appetite. In that regard, sterling is not particularly attractive with the UK looking weak compared to other European countries.
Although earnings forecasts have remained unchanged since mid-May for the S&P 500, and downgrades have been trailing off for the STOXX 600, the Q2 earning season should be the worst for many years. High equity valuations are supported by lower yield and ample liquidity. Structural growers, which have benefited from the COVID-19 outbreak, are still favoured.
Having fallen below levels seen in the financial crisis of 2008-2009, relative valuations in the consumer staples sector now seem attractive, with the outlook for revenues fine. The rebound in the US consumer discretionary sector will largely depend on the improvement in the job market.
We continue to expect the 10-year Treasury yield to rise by end 2020 in inflation expectations grow, but the Fed's commitment to a loose monetary stance means the rise should be limited. We are revising our Bund yield forecast from -0.4% to -0.2%, due to larger-than-expected fiscal stimulus.
We continue to favour quality in credit. We are increasing our interest in select US high-yield 'fallen angels'.
Having lagged the rally in credit, we now believe spread differentials make Asian investment-grade corporate bonds relatively attractive. We believe North Asian (ex Japan) equities offer better visibility than equities in other emerging markets (EM) and should benefit from China's post-pandemic recovery.