Equities swinging between hope and despair

20 September 2020

The coronavirus alarm bells started ringing as soon as Europe’s all but sacred summer holidays ended. The number of cases has started rising again and fresh restrictions threaten attempts at economic recovery. In the USA, the pandemic is still spreading quickly; the country’s death toll is the highest in the developed world and could cost Donald Trump the presidential election. Although Chinese statistics are not necessarily credible, the fact remains that Asia has coped best with the crisis. Authoritarian regimes and/or greater cultural discipline are certainly part of the explanation. Japan has suffered 12 coronavirus deaths per million, compared with 616 (and rising) for the USA. Germany is at 113 and France is at 485 despite a more costly health system than in other European countries. So far the surging number of cases has not meant a proportional increase in deaths: the detection rate is higher and treatment has improved.

Dominated by Wall Street, stock markets are swinging between hope and despair. Investors’ eyes are fixed firmly on the media, where alarming news on the pandemic alternates with good tidings on vaccines and care. The markets have just rebounded from a 10% correction on hopes for vaccination. Despite the crisis, US equities are still over 5% this year. Except for China, all other markets are in the red. Gafam are largely responsible for Wall Street’s relative health, while the financial and energy sectors are down significantly. The market does not seem to be nervous about the solidity of the financial system; after all, central bankers are prepared to pump trillions into it if required. The real estate sector is not a stock market heavyweight but is a spectacular casualty. This reflects its exposure to retailing, offices and hotels, all of which are vulnerable to bankruptcy.

The outlook for world GDP growth this year has sagged again, from -3.85% to -4.27% following revisions from Europe, Japan and India. In contrast, China has revised its projection upwards, to 2%. The consensus forecast for 5.2% growth in 2021 is fragile, although China is banking on 7.9%! This is upsetting Americans who fear that China is catching them up by using the same tech-driven model; some want embargoes on China as a result.

Massive liquidity injections in the form of central bank purchases of government bonds are still a major support factor for the financial markets. In the USA, the Federal Reserve financed a first wave of government crisis support worth trillion and will do the same for the second wave, amounting to perhaps
[ trillion. The ECB is in a similar situation. US federal government debt now totals .8 trillion, or almost 100% of GDP, and it is likely to rise to 110% as a result of the latest stimulus package. 34% of this debt is held by foreign investors, with a further 35% by the Fed. In the meantime, the US trade deficit has widened to billion per month. All this leads us to confirm our recommendation to underweight the dollar and invest in gold. US monetary policy will remain accommodating for a very long time, even if inflation rises above 2%.

Macroeconomic data are mixed. Chinese car sales are back to pre-pandemic levels; in the USA, we note fairly good PMIs and the return to work of around half of furloughed workers. The US inflation rate has inched up to 1.3% because of higher food and raw materials prices. Forecasts for S&P 500 EPS growth are unchanged at -21% in 2020 and +27% in 2021. Our theoretical index objective for year-end is 3,448 points, which the market exceeded last month. There was a buying opportunity when the index dipped to 3,237 points. We have been overweight equities since the end of March, when we were buying at 2,600 points.

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