Macroeconomy

Covid-19’s impact on economies and financial markets

We are revising our growth forecasts for the world economy and asset classes in light of the growing fallout from the virus.

Asset Allocation & Macro Research Team

Covid-19’s impact on economies and financial markets

Macroeconomy. Covid-19’s spread beyond China to other countries essential to supply chains risks extending the impact of the virus outbreak on the global economy. We thus have decided to revise our 2020 GDP growth forecasts for China, the US, the euro area and emerging Asia. This salvo of revisions lowers our forecast for world GDP growth this year from 2.8% to 2.5%, meaning we are on the brink of a global recession (generally considered to be a growth rate of below 2.5%).

Equities. We are revising our 2020 earnings growth forecast from 3.8% to 3.1% for the S&P 500 and from 4.4% to 3.4% for the Stoxx Europe 600. We are sticking to the valuation ratio forecasts we set out last November as the sovereign yield environment remains supportive. Cash returns to shareholders are still expected to be paramount in 2020. We are reducing slightly our 2020 target for developed equity markets, believing now that the S&P 500 will end the year at 3200 compared to our previous forecast of 3280. We are leaving our year-end target for the MSCI Emerging Markets index unchanged at 1080, but now expect a different trajectory, with near-term deterioration followed by improving momentum in H2.

Fixed income. The growing risks facing the global economy mean we have decided to adjust lower our forecasts for core sovereign yields. We expect further falls in yields until June before a rebound in H2, with the US 10-year yield ending the year at 1.4% and the German Bund yield at -0.4%. While credit spreads could also widen further until at least June, we are keeping our year-end forecasts for them unchanged. We expect monetary and fiscal easing, along with a fading of the virus threat, to support risky assets later in the year.

Currencies. The deterioration in global growth should favour defensive currencies over cyclical ones. While considered a safe haven, the overvalued US dollar is under pressure as it is losing its high-yielding advantage. Our 12-month forecast for the EUR/USD rate is left unchanged at USD1.16. We have adjusted higher our 12- month forecasts for gold, the yen and the Swiss franc relative to the US dollar to USD1780, JPY100 and CHF0.91, respectively.

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