Macro Matters – June 2020

(Source: Merlea Macro Matters)


Much of the recent rise in the market has been attributed to FOMO, which is the acronym for “Fear of Missing Out.” As the market has climbed steadily higher in V-shaped fashion, more and more investors become concerned that they will never have an opportunity to put cash to work at attractive prices. What is most interesting is that FOMO is an emotional reaction that pushes us to trade or invest in a less disciplined way. Rather than buy stocks when they offer the most attractive risk-to-return ratio, investors are driven to buy them to an even greater degree the less attractive they look technically. Our fear of missing out becomes greater the more the market continues to act in an irrational way. FOMO is frustrating because it arises when we have been doing the right thing. The best way to deal with FOMO is to be aware that it is going to occur no matter what you do. It is the nature of the stock market to act at times in a way that will makes us feel like we have made a mistake. FOMO has been the worst psychological element that side-lined investors have had to deal with since the March crash. And this dynamic is going to continue driving and impacting the market until the substantial cash and liquidity balances decline.

When to return to markets?

Looking at peak VIX (Volatility Index) for the years dating back to 1990, 2020 (through April 20) was 82.69, higher than any other period of heightened volatility including the GFC. 2020 peak VIX 2.27x 1990, 1.81x 1998 and 1.02x the GFC.

There are many market timing indicators worth keeping track of, and we follow the VIX closely. A good time to go fully invested is generally when volatility passes. The VIX has been as high as 80 in this crisis and it has only been at 80 once before in my lifetime, which was during the GFC. Then, it took seven to eight months to fall back below 40, as the chart above shows.  Our view is to wait until volatility subsides, which means potentially giving up a bit of relative return in the short term. For absolute returns over the longer term, ultimately the next bull market will be like those that have come before and will be long and fruitful.

Where will we invest when the time is right? The bottom line is that earnings growth drives stock prices. We are focusing on companies that will be better off on the other side of this crisis. Some of them have taken a hit this year, but we want to focus on those that will be better off over the next three to five years.  There is no doubt that there are still tough times ahead for markets and economies, and there will be no avoiding a downturn.  History has shown that investors can afford to miss the absolute bottom of the market, and still make good market gains.  We need to remember that a diversified investment strategy provides us with the highest probability of obtaining our financial goals while exposing us to the least amount of volatility possible. When the media and our acquaintances insist on informing us how we would have been better off placing heavy bets on the asset categories that have recently done well, we would be well served to remember that a diversified portfolio strategy will almost certainly provide us with the best chance to achieve long-term investment success.


The recent risk market rally reflects hope for a sharp recovery as economies slowly reopen. However, bond markets are once again diverging from equities and predicting a different future. Call me biased but my bet is on bonds. Bond markets are seldom incorrect in the long run. For now, investment grade credit is best placed to navigate risks without foregoing too much return. What we are presently seeing is a dislocation between bond and equity markets. The rally in equities is painting a bullish picture of the economic future, whereas bond yields are reflecting the likelihood of a more muted global growth. It is difficult to explain the current overall ‘risk-on’ sentiment, which is mainly based on hope that economies reopening will lead to a sharp recovery in growth. However, bond markets are erring on the side of caution as geopolitical tensions are starting to rise and the pandemic related risks haven’t yet subsided.

Tensions between the US and China are rising once again with the US calling Hong Kong’s autonomous status into question. COVID-19 cases are also increasing in some of the US states that have already reopened their economies and civil unrest over the past few days could further escalate the number of cases. The threat of a second wave of infections cannot yet be ruled out. The only thing that stands out to me that  possibly explains the difference in the performance of bonds and equities over the recent past is that central banks globally have injected a huge amount of liquidity into markets, which needs to be invested.

Another area of concern for me is the current level of yield from government bonds. Government bond yields are remaining low despite the high expected government bond issuance volume required to finance the economic stimulus. This should put upward pressure on bond yields, however, the surplus liquidity in the market is balancing this out and resulting in yields trending sidewards. Government bond yields are low (and negative in some countries) compared to historical levels and the economic outlook would suggest being cautious at this stage with higher risk bonds, which offer higher yield. It is my opinion that investment grade (IG) corporate bonds are presently best placed to provide an income source while protecting the invested capital (exposure available via ETF’s). These bonds tend to be more liquid and hold their value better.

Listed Property

For property and infrastructure investors, the challenge is to navigate current conditions and extrapolate how the world will change on the ‘other side’ to work out the survivors and thrivers. Leverage across the A-REIT sector at the end of 2019 was only 29.5%, compared to north of 40% during the GFC.  Thanks to this level of conservatism, it does not appear that any property stocks are about to breach debt covenants, nor are they crying out for capital. However, this could change as certain types of tenants start to feel the pain of the ‘stay-at-home’ economy I believe the March low looks to have been the bottom for AREITs due to the high level of uncertainty in the market around the impact of COVID-19. The strong sell-off in the A$ had significant implications for AREITs due to high offshore ownership, coupled with higher exposure to retail real estate (compared to other countries) contributed to the weak performance The sell-off presented significant value opportunities for long term investors willing to stomach the risk of the unknown.

April saw a strong recovery as the sector was oversold, with offshore investors re-emerging on the back of an improving A$ driven by the Australian Government’s significant stimulus response and the realisation that the country is in a relatively solid position to emerge from COVID-19. Going forward there will be a stabilisation period through the next year to 18 months for the sector. Then from that, A-REITs will be able to grow, hopefully in a sustainable, steady manner, the majority of that return coming from income going forward.

The key for many investors will be the fact that the yield that they provide compared to other asset classes, cash, term deposits and fixed income, will be very attractive. That will continue and will be a key benefit for many investors seeking to invest in the sector now or the in coming months because the uncertainty is the opportunity for many investors as well. While the drivers and risk profiles are different, the opportunity to invest into AREITs right now is like the buying opportunity presented during the GFC where value existed for those focused on the long term. What followed was a decade of solid growth, with AREITs returning 11.6% p.a. over the decade to December 2020, underpinned by income which drove a solid 6.2% p.a. yield.

Australian Equities

More bad news lies ahead in the short term, starting with the tragic human cost. Historic unemployment will likely have a lasting impact on the economy, and many businesses are failing. The path to economic recovery will depend on the course of the virus and public health response, and stock markets may bounce around for an extended period until the economy finds firmer footing. Over the next six months, we will see some challenges, and I expect consumer demand to remain sluggish for some time. That said, and as I have noted, Australia itself is in a relatively good spot, having contained Covid-19 successfully, and with the government pushing ahead with a recovery plan to reinvigorate the economy. Scott Morrison has outlined the ‘reboot’ strategy to the Committee for the Economic Development of Australia, with medium to longer term investment initiatives on ‘shovel ready’ infrastructure projects which are a great idea, and something which we will see globally.

Recent reports prices for stainless steel have risen in China due to strong demand as the economy gets back on its feet after lockdown.

This is also why I think that we will likely see a new bull market in resources, with rising demand for the likes of steel, iron ore, nickel, copper, and other bulk metals. Pricing should also be underpinned by the inflationary consequences of post Covid-19 monetary stimulus.  Given this scenario I think any corrective pullback will prove a great opportunity to gain exposure to high quality resource names for those that don’t own them already. BHP, Rio, and Fortescue were all weaker yesterday, but it was notable that iron ore prices barely flinched, at US$103. This is telling and signals that the demand for hard commodities is only going to rise from here, and with the ‘rebuilding and investment’ plans that will occur globally. If global growth also works out better than feared the energy markets will also likely drift higher over the medium to longer term. Oil prices most likely pause in the near term after a stellar recovery from their lows (and even negative prices back on the May futures contact), but if the world starts growing again (and OPEC maintains production cuts) it is not difficult to envision oil moving back over US$50+.

Global markets

While there may be some link with reality and the value of stocks, a large proportion of what we’re seeing is a reaction to things seemingly not being as bad as first thought, and also a wilful desire to pretend things are not as bad as they are.

Markets are forward-looking

Although this may seem unintuitive, there is, in fact, a large body of evidence which shows that there is a very weak relationship between equity returns and economic growth. You should not necessarily expect the two to move in tandem.

The most important reason is that a company’s stock market value can be thought of as the present value of all its future earnings. These are related to economic growth but not on a one-to-one basis. Its value usually reflects not only what is happening right now, but also what is forecast to happen next year, the year after, and so on. Stock markets are generally forward-looking. In contrast, much economic data tells you about what has happened in the past. To give an obvious example, GDP growth figures are not released until after the quarter has ended.

As well as stock prices being forward looking, there has also been an additional catalyst which has spurred some markets higher in recent weeks. This has led to an even greater apparent disconnect between those markets and their related economies. This catalyst is the huge stimulus package that central banks and governments have unleashed. Central bank and government support also appear to have eased fears over some of the worst-case scenarios that markets were worrying about earlier this year. And central bank liquidity injections appear to have helped to support asset prices. Despite all the liquidity sloshing around, that may not enough to keep businesses afloat and get consumers to start shopping again. Revenues are likely to remain under pressure for the foreseeable future. Entire industries are exposed. Many companies are likely to struggle to afford debt repayments, increasing the risk of a wave of defaults and bankruptcies.

However, there are risks in the forecast of economic recovery in Q3, including:

  1. The progress of the virus cannot be forecast. The number of cases in the U.S. may be under-reported, and there could be a dramatic escalation in confirmed cases. The containment measures may be more drastic, and the recession could continue into Q3.
  2. The economic impact of the virus may turn out larger than expected. There is evidence that labour markets have already been damaged, and the shock to consumer and business confidence could generate a self-sustaining economic downturn. There also could be a credit-market event that leads to rising defaults and liquidity issues, which in turn creates fears of a 2008-style downturn. Global supply chain disruptions may have a larger and more sustained negative impact on global growth.
  3. Central banks have limited firepower compared to previous recessions. The U.S Federal Reserve, Bank of England, Bank of Japan, and European Central Bank (ECB) are already at the zero-lower bound.

Basically in a blink of an eye the US Fed doused cold water over the aggressive reflation trade which was taking a grip on stocks as investors decided the coronavirus was well and truly in the rear view mirror and a “V-shaped” recovery was almost inevitable. The Federal Reserve’s provided a grim update on the economy, the Central Bank forecasted a long recovery, with unemployment set to remain high for years and interest rates staying near zero until at least 2022. Fed chair Powell really reminded investors that there is a huge gap between the economic reality and the market reality.

Shares are vulnerable to a short-term consolidation or pullback, but if we are right and April was the low in economic conditions then shares are likely to be higher on a 6 to 12-month horizon. The experience of the last few months highlights just how hard it is to time market bottoms – a good approach for long-term investors is to average in over several months after major falls.


Financial markets have seen this story before: The Federal Reserve rides in with piles of freshly minted digitized money that helps send the prices of stocks and other assets lurching forward. Financial conditions are extraordinarily loose and accommodative. One of the things that the Fed balance sheet liquidity has done has also been to allow the U.S. dollar to weaken for really the first time in about two years. These are contributing to this move in the market.

Investors should modify their expectations for returns in equity markets in 2020 because of political uncertainty in the U.S. and abroad, slowing corporate earnings growth, China trade uncertainty and the lessened likelihood of future rate cuts by the Federal Reserve.

If it were only about a sea of money floating everything, then you would think that stocks across the board would be going up. That is not the case. In fact, there is a dramatic difference in how individual companies are faring that reflects the assessments of how they will do in a pandemic world. Companies that are seen as especially vulnerable, such as retail stores spread across malls, are seeing stock declines of 50% and only marginally recovered since March. Energy companies, with falling demand for oil and high debt loads, are in some cases on the verge of bankruptcy, and even the survivors have seen their stock more than halved since March. The same is for airlines and hotels.

On the other side, clear beneficiaries of the current upheaval are doing well. Five mega-tech companies – Amazon, Apple, Microsoft, Facebook, and Google – alone make up $5 trillion of market cap. Costco and Clorox have seen booming business along with Walmart, as has the video conference company Zoom. One fifth of the S&P 500’s market cap is accounted for by the five big tech companies, marking the highest level of concentration for the index since the 2000 tech bubble, when equity market concentration stood at 18%.  With the tight concentration of these five names, the S&P 500 is just 17% below its February record high. However, the median stock in the index trades 28% below its high, showing the distortion of having the five mega-cap tech stocks performing so well. The narrow market breadth is worrying because it has historically meant below-average market returns, with the research showing that such narrowing preceded the recessions of 1990 and 2008 as well as economic slowdowns of 2011 and 2016. Even more worrying, it is often the case that the market leaders’ performance doesn’t match the hefty valuations they’re ascribed, meaning they “catch down” to their weaker peers. Though in some cases, when economic conditions improve, the laggards have been able to catch up. So while markets are not moving on real-time economic fundamentals, they are moving on reasonable judgements of fundamentals going forward and distinguishing between industries that look to be hardest hits from those that might even benefit from the dramatic economic dislocations that COVID-19 responses are creating. If everything were going up indiscriminately, that would indicate markets were fully detached. There are not. So, while it appears crazy that markets are doing relatively well as the world economy collapse down, there is a method to the madness that reflects some potentially positive realities of an otherwise uncertain time.


The proposed ‘Next Generation EU’ recovery fund could be a net supportive factor for EU sovereign ratings, depending on its final design. Without the backing of all 27 EU member states, it cannot go ahead. But Germany and France have backed plans for the money to be raised on the capital markets. The €750bn fund would be made up of €500bn in grants and €250bn in loans. It would be raised by lifting the EU’s resources ceiling to 2% of EU gross national income and would be reliant on the EU’s strong credit rating. When added to a proposed €1.1 trillion budget for 2021-27, the €750bn recovery fund would bring to €1.85tn the amount that the Commission says will “kick-start our economy and ensure Europe bounces forward”. When added to an earlier €540bn initial rescue package, that would amount to a total of €2.4tn.

The money raised on the capital markets would be paid back over 30 years between 2028 and 2058, but not later. The Commission says it could be paid back in several ways: A carbon tax based on the Emissions Trading Scheme A digital tax. A tax on non-recycled plastics The Eurozone is likely to experience a deeper recession than the U.S. but should also experience a bigger economic bounce when the virus subsides. It will be one of the main beneficiaries of the rebound in global trade. Eurozone equities are now very attractively valued, and we would look for the European stock market to be one of the best performers in the recovery.

United Kingdom

UK GDP fell by 20.4% in April, not far off economists’ expectations of 18.7% (according to a survey by Bloomberg), and much lower than the drop of 5.8% in March. In terms of level, this decline effectively erased 18 years of economic growth, bringing total GDP back to 2002 levels! The services sector fell 19% in the same month. Within services, distribution, hotels and restaurants fell the most, down 37.3%. Industrial and manufacturing production also tumbled in April, down 20.3% and 24.3% respectively. The number of people claiming unemployment benefits in the UK increased by 528,900 to 2.801 million in May, following an upwardly revised 1.03 million increase in April. Looking ahead, it is likely that the month of April marks the trough for GDP as the UK restarts to relax its lockdown measures. Manufacturing and construction will probably rebound first as they were called back to work since 13th of May. The recovery for services industries come later as the easing of some high street restriction applies on 15th of June.

Indeed, more timely data shows activities coming back to normal at a gradual pace. For example, the monthly Purchasing Managers Index, a proxy for economic growth, has rebounded in May for both the manufacturing and services sectors. They printed 40.7 and 29.0 compared to 32.6 and 13.4 in April, respectively. Although readings below 50 mean that purchasing managers are still in recession mindset, but at least they generally feel better in May than April. Meanwhile, the Google Mobility Report, which tracks world traffic, shows that mobility in the UK has gradually picked up since middle of April.

As and when the UK fully lifts lockdown measures, the path to recovery could be further hastened by extremely supportive policies by both the UK Treasury and the Bank of England. The UK Treasury has already promised £350bn in support of the economy, whilst the Bank of England has reduced interest rates to almost zero, a record low, which will boost interest rate sensitive sectors such as real estate.


Economic activity has resumed in Japan with the lifting of the state of emergency declaration.  In addition, the second supplementary budget, the largest on record, was decided following the large-scale economic stimulus measures in April, and other support for the economic recovery is increasing. Although the economy is expected to emerge from its worst period in the post-war era, the recovery is expected to be gradual, mainly because of the gradual resumption of economic activity amid warnings of a second wave. Corporate performance continues to be difficult due to weak consumer spending caused by the Corona disaster. More than half of the companies have not provided corporate earnings guidance for fiscal 2020 due to the uncertain outlook, and many of the companies that have disclosed it are forecasting a decline in revenue and profit. Although a recovery is expected, it is expected to take at least two years to return to pre-infection profit levels.  For the time being, the Bank will closely monitor the impact of Covid-19 and will not hesitate to take additional easing measures if necessary, and also it expects short and long-term policy interest rates to remain at their present or lower levels. BoJ governor Haruhiko Kuroda also signalled local interest rates would not rise for the foreseeable future (no surprise there), with the takeaway being it would likely be at least March 2023 before it was reconsidered.


While China’s economy is slowly restarting, major European economies are in turmoil and the United States is still in the early stages of ramping up its response with unprecedented fiscal measures. China will likely struggle to find enough customers across the West, and emerging markets elsewhere are simply not large enough to compensate. Affected sectors include automobiles, as major Western companies have closed production, and communications equipment, as supply chains have been disrupted. The outbreak will likely force a re-examination of the logic underpinning the U.S. administration’s extensive use of tariffs to pressure China on trade and investment reforms. The phase one trade deal concluded in January is now inoperative, since there is no possibility that China can meet its agreement to purchase vast quantities of American goods this year. More importantly, the U.S. strategy to pair tariffs with trade restrictions is incompatible with new priorities, such as ensuring producers have access to necessary parts. China is pouring billions into global efforts such as Xi’s Belt and Road Initiative (BRI) to forge stronger links with countries around the world.

The risk of a military confrontation in the South China Sea involving the United States and China could rise significantly in the next eighteen months, particularly if their relationship continues to deteriorate as a result of ongoing trade frictions and recriminations over the novel coronavirus pandemic. China’s increasingly harsh diplomatic approach could do more harm than good.

Anti-China sentiment has played a pivotal role in election surprises across Asia, and more countries around the world are becoming sceptical of Chinese investment – particularly in telecommunications, with fears growing about using its equipment in 5G networks due to concerns about espionage. For better and for worse, the global economy is based on connectivity. The revival of world trade and well-functioning supply networks is essential to aid growth in both China and the West.


It is very possible that monetary policy will trigger a renaissance of hard assets. If that thesis is correct, the battered commodity sector should also offer opportunities to courageous contrarian investors. Relative to the Dow Jones index, commodities are currently trading at the lowest valuation level since the mid-1960s.


Against a global backdrop characterised by risk assets running ahead of the weak economic data in some regions, gold remains an important asset in the hedging component of our portfolios. While uncertainty over the coronavirus timeline persists, gold is unique in that it can act as a useful hedge against any potential selloffs, and is also well positioned to take advantage of conditions created by the expansionary fiscal and monetary policies intended to help mitigate the impact of economic lockdowns. The physical commodity itself was impacted by coronavirus as well. The spread between gold futures and physical gold usually tracks closely but blew out wider over this period. There were disruptions to shipments, refining capacity constraints, and lower jewellery demand from India and China. But with the fading of these factors we see a return to normality and reduced likelihood of gold selling off with risk assets. Most importantly, our view on gold is supported by the major policy responses from governments and central banks. Given the size of the monetary easing from global central banks, we see yields as likely to remain subdued. This is positive for gold as a non-yielding asset as lower yields reduces the opportunity cost of holding gold.


While the oil market remains fragile, the recent modest recovery in prices suggests that the first half of 2020 is ending on a more optimistic note. New data show that demand destruction in the early part of the year was slightly less than expected, although still unprecedented. On the supply side, record output cuts from OPEC+ and steep declines from other non-OPEC producers saw global oil production fall by a massive 12 mb/d in May. Output from non-OPEC countries outside the deal has fallen by 4.5 mb/d since the start of the year. To further speed up the market rebalancing, OPEC+ decided on 6 June to extend their historic output cut of close to 10 mb/d through July.  China’s strong exit from lockdown measures has seen demand in April almost back to year-ago levels. There also  has been a strong rebound in India in May, although demand is still well below year-ago levels  So far, initiatives in the form of the OPEC+ agreement and the meeting of G20 energy ministers have made a major contribution to restoring stability to the market. If recent trends in production are maintained and demand does recover, the market will be on a more stable footing by the end of the second half of 2020. EIA expects monthly Brent prices will average $37/b during the second half of 2020 and rise to an average of $48/b in 2021. The forecast of rising crude oil prices reflects expected declines in global oil inventories during the second half of 2020 and through 2021. EIA expects high inventory levels and spare crude oil production capacity will limit upward price pressures in the coming months, but as inventories decline into 2021, those upward price pressures will increase.

To be sure, our business cycle indicators show that economies across the world have picked themselves off the floor. Daily activity trackers from the likes of Google and Apple show most developed countries are edging towards normality.






Australia’s exposure to China is key to the outlook. Saying that, while the recent recovery in global equity and commodity markets has proven supportive, rising trade tensions with the world’s second-largest economy could prove problematic. Any impact to growth in China will in turn likely impact on demand for Australian exports, which would bode negative for the Aussie Dollar.





We expect gold to end 2020 around US$1,725/oz, before

rising above US$1,800/oz during the latter part of 2021.


Trade and geopolitical tensions (including Hong Kong) between the Us and China, and a very weak global economic backdrop

with supportive monetary and fiscal policy has supported

the precious metal.


Interestingly, April saw the US import 111.7 tonnes of gold from Switzerland, a monthly record, reflecting strong investor interest in the current turmoil. Gold should continue to see underlying demand as a safe-haven, given inflation expectations and central bank QE programs.







Metals prices generally tracked higher in May and into early June, largely on hopes that recovering activity in China will result in stronger demand, along with the potential for supply disruptions – particularly from South America.


It is worth noting that prices remain well below typical pre-COVID-19 levels, and that weakness in demand – both for end-user products and manufacturing – in non-Chinese markets is likely to persist. Prices are generally forecast to increase across 2021 – which will see the year average price exceed that of 2020.


Oil prices have recovered from their lows but are likely to remain capped given ongoing oversupply and a slow pick-up in demand. Over the medium term, prices should rebound further as supply and production balance out, but we still expect supply to remain ample.





In such a low-interest environment, AREITs offer a reliable and predictable income stream. The fundamentals of the property sector remain strong, even in retail.


Australian listed trusts are not just rent collectors. Many have integrated business models, ranging from development, to funds and asset management. Rapid growth in fund management in recent years has given these vehicles both a source of third-party capital to reduce reliance on borrowing and a new stream of recurring income.



Australian Equities


I am expecting the stock markets to retrace in the short to medium term as they price in the negative consequences of rising unemployment and lower profits.


Furthermore, uncertainty leads some investors to recalibrate their portfolios in favour of bonds and away from equities.


Australia is in a relatively good starting position to transition the three economic phases having to-date endured a low infection and mortality rate. The capacity for fiscal and monetary stimulus is also strong and our major trading partner China is on track to be an early post pandemic recovery economy.


Equity selection with a quality and growth bias will bring value in the coming months. Not all beaten-down cyclical stocks look attractive, however. The financial sector, for example, is undoubtedly both cyclical and cheap. However, we do not expect a value rally for some months to come.





The Australia Government Bond 10Y is expected to trade at 0.96 percent by the end of this quarter, looking forward, we estimate it to trade at 1.09 in 12 months’ time.


With the implementation of extreme Government fiscal stimulus across the globe, inflation is back on the radar. History has shown that it’s very difficult to deliver inflation below zero on an ongoing basis. Even Japan managed only a few short bouts of this, and that was with very challenging demographics and multiple policy missteps. Australia should fare considerably better, so this gives us greater confidence to be a strong buyer of ILBs when breakeven are within the broad vicinity of zero, as they still are currently.



Cash Rates


On hold @ 0.25%


Look to invest some cash into short duration high quality credit. While spreads have come back since their March high, the asset class still offers some carry and spreads could continue to tighten further even though the potential is somewhat limited. Short duration, good quality as well as the central banks’ backstop should contain downside risk in the event of a return of market volatility, offering a more attractive risk reward profile than cash.


Global Markets




Short term weakness.


Spending is all but certain to regain some ground as the economy re-opens and as consumers resume their normal activities in the coming months. However, the magnitude of the revival will hinge on whether the virus can be successfully contained and the ability to restore job losses in a timely manner, which will ultimately dictate whether consumer’s re-engage fully in their spending habits.


The ‘don’t fight the Fed’ mantra is now well established and could further support near-term momentum. Markets have rallied despite concerning economic fundamentals. We maintain our negative outlook, particularly in the small cap space given still high relative valuations and less ability to deal with weakening fundamentals.





In Europe, Germany should recover more rapidly than other partners, as its COVID cases and lockdown period were limited.


With growing market enthusiasm for risk, fiscal policymakers appear to have overcome their initial angst about additional measures with France, Germany and the European Commission tabling a potentially game-changing proposal that involves both common debt and grants rather than loans to fund a transition from battling the virus to a promise of Pan- European economic transformation.


Our European view remains negative as uncertainty persists over the tentative path out of lockdowns. Banks that are already under significant strain are being asked to step up in support of the economy, and Brexit tensions are back.


Our view is neutral. The UK’s trading negotiations are back in the spotlight given tensions. Policy responses have been meaningful, and valuations are attractive, but markets are still vulnerable given a weak starting point. The FTSE 100 has a high exposure to energy – a sector that is unlikely to see a strong recovery in the near term. The UK market could suffer a period of turbulence.





Add on pullback


Japan is a country where a halt in tourism could prove a boom to domestic spending, as people switch to shopping at home rather than abroad. Authorities have also been proactive Japan’s cash-rich companies should cope better with the economic slowdown, although exporters will suffer from lower demand and a likely stronger Yen. The recently announced $1 trillion stimulus plan may not be enough to help offset the GDP contraction in Q2, but it should allow the BoJ to maintain its monetary policy framework for longer.





Stand aside due to COVID-19 second wave.


Chinese growth should get back to positivity in Q3, thanks to

recovery in different sectors; renewed tensions with the US,

and instability in Hong Kong, push China towards more reforms

and further support to domestic demand (consumption,

infrastructure and new technologies).




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