Global CIO Video: Manufacturing recovery on hold
Just when the recovery in industrial production was gaining pace, the novel coronavirus reined it back in. The outbreak poses a new challenge to the global economy as it has interrupted global supply chains and caused significant uncertainty. In the new Global CIO video, we look at the latest developments and our current views.
The coronavirus has surprised us in terms of its scope and scale. Against this backdrop, we have slightly scaled back our growth forecasts for the global economy, as China, the epicenter of the outbreak, is responsible for about 30% of global manufacturing. While the recovery of manufacturing is likely to be delayed, we believe that the second half of this year should see a strong rebound as conditions normalize.
In the Investment Committee (IC), we have carefully assessed this current backdrop. If history is any guide, the market impact of the outbreak will be temporary. In fact, equities in developed markets have been remarkably resilient so far. We will keep the strategic allocation of portfolios unchanged for now, but it is worth noting that equities continue to offer attractive return prospects on an absolute basis and in comparison with high-grade bonds.
Looking beyond the volatility
We require greater visibility with regard to the extent and length of the outbreak in order to tactically turn more positive on equities again. Commodity markets have taken a hit given their sensitivity to the Chinese and global economy. Yet by now, we believe that a considerable shortfall in demand is reflected in prices and that the broad commodity index offers upside from current levels. We thus maintain our modest overweight allocation to the asset class in portfolios.
Looking beyond the volatility caused by the virus, the IC is looking a little more positively at equities in emerging markets (EM). We believe the uptick in the global economy will support growth and valuations are attractive, leading to an improved expected return perspective. The phase-one trade deal between China and the USA will broadly support demand and returns for EM.
We are neutral regarding Asia, as the virus is likely to have an impact on growth trajectories around the region. We are positive, however, on Latin America, in particular Brazil over Mexico.