Monthly outlook end-April 2020
- 18 May 2020
- 5 mins reading time
Lockdown to continue
We anticipate some form of social restrictions to persist into the third quarter of 2020. The sustained nature of the hiatus is likely to cause a substantial contraction of the global economy in 2020. This comes after a period of slow economic growth, and before a huge build-up of government debt that would have paid for the measures implemented to sustain households and businesses during the crisis.
While we are allowing for a bounce back in 2021, the more immediate question is, how much of this is already reflected in market prices?
What’s cheap and what’s expensive
The prices of benchmark 10-year US government bonds appear to be suitably high (reflecting demand for their low-risk rating in a time of uncertainty). Equity prices, by contrast, appear too high reflecting too much optimism among investors for a short-term solution to the virus and lockdown situation.
Digging further into shares, we continue to see a two-tier market. Companies seen as either “high quality” or offering long-term growth appear to have risen above what we consider to be fair prices. By contrast, there are “value” stocks that do not have those characteristics but appear to be under-priced at the moment.
Corporate bonds also seem attractive. We feel that the demand for them has not yet pushed prices up to fully reflect the substantial financial support by governments and central banks that ought to shore up the ability of companies to meet their bond and other debt obligations.
Meanwhile, the flattening of the coronavirus infection rates is welcome news, but we are also aware that, for now, the only way of containing the virus is through reduced levels of economic activity. Just as we need to be patient about our working and living arrangements, we believe that some care is still needed before moving more money into higher-risk rated opportunities such as equities.
Any views expressed are our in-house views as at the time of publishing.
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