Global CIO Podcast: "This is unprecedented"
We are living in unprecedented times, and each day brings new data confirming the devastation wrought by the coronavirus disease (COVID-19) pandemic. The latest composite Purchasing Managers' Index (PMI) for April for the Eurozone, for example, sank to a record low of 13.5. To put this drop in context, the PMI would usually move between 45 and 55, with a level below 50 signifying a contraction.
Yet after weeks of uncertainty amid deteriorating coronavirus infection and fatality rates, we have lately seen signs of improvement and discussions about how to exit the strict lockdown measures that were put in place to contain the outbreak. A sense of relief has also been tangible in financial markets, with equities sharply rebounding and equity market volatility coming off its highs.
Though it is too early to sound the all-clear, the success of containment measures and the implementation of substantial monetary and fiscal policy programs inspire confidence that the fallout of the pandemic can be limited to a violent but short contraction in China, Europe, the USA and other fundamentally strong developed and emerging economies. While making economic projections remains an uncertain exercise, we are forecasting a tilted V-shaped recovery in H2, with global gross domestic product (GDP) expected to contract by 1.6% this year, followed by +3.9% global GDP growth in 2021.
Equities: Attractive return potential
In mid-April, the Investment Committee decided to maintain a small equity overweight in portfolios even after the strong rebound in recent weeks. Though temporary setbacks remain possible, we believe markets will look beyond the short term and focus on equities' attractive return potential.
We also remain positive on emerging market (EM) hard currency bonds. Even after their recent gains, EM hard currency bonds offer attractive value, as many EM governments are now better placed to weather economic adversity than in prior crises. As the US Federal Reserve has expanded its bond buying facilities to include lower-rated bonds, we have now adopted a positive view on high-yield bonds.