Global equity strategy amid the pandemic
Fiscal and monetary responses from governments and central banks in both developed and emerging economies since March have been unprecedented, far surpassing actions taken during the Global Financial Crisis of 2008, especially the size and speed of the policy response from the Federal Reserve and the US government.
Globally, quantitative easing (QE) by central banks in 2021 is expected to more than double the previous peak in 2010 after the Financial Crisis. To put the scale of things in perspective, in three to four months of this coronavirus crisis, the Fed has done twice as much QE as during the entire global financial crisis period from 2008 to 2010. It is an important signal that this recession is unlikely to become a financial crisis when companies were still able to issue long term debt at very low rates, even in those sectors that had been most negatively impacted by the coronavirus.
Global equities at the start of 2020 were broadly trading in the mid to upper teen multiples of forward earnings. This is very different to the tech bubble of 2000. At that time, the developed world was trading at much higher market valuations of 25 to 27 times forward earnings, with many internet and technology companies even more richly valued. It is clear that we are now in a world where interest rates are going to be lower for even longer than previously thought. Sovereign bond yields have been compressed to ultra-low levels throughout the developed world countries and are now also falling sharply in emerging markets (EM).
The COVID-19 could change the growth profile of the EM countries. During the global pandemic, China has been the best performing major economy in the world and the first to recover. While China was the original center of the coronavirus, the year-to-date return of China A shares has been as good as the return on NASDAQ. Countries with low levels of debt to GDP, “normal” interest rates and meaningfully higher structural growth rates, such as India, Indonesia, Philippines, Vietnam and Peru, are becoming more important in the EM universe to international equity investors. Exporters of manufactured goods, like Korea and Taiwan, and commodity exporters, such as Brazil, Russia, South Africa and the Middle East, are countries that are essentially included in the EM universe for various reasons.
To the extent that COVID-19 is leading to a lower-interest-rate world for longer and also a lower-growth world for longer, being able to invest in the abovementioned fast-growing EM countries will be more important than ever. Many successful multi-national companies appear to be increasing their focus on these EM countries, with a view to building up their operations there.
After such a strong rebound, it makes sense to be more prudent as there are still a number of significant risks for investors to contend with, including the economic recovery, China-US tensions and the US election. In response to these risks, it is worth considering trimming those companies with considerably higher prices, even if their growth prospects remain sound. Interestingly, aside from stocks that look to be potential winners in the post-coronavirus economy, financials is another area to look at. Early in an equity cycle, it is often the banks and materials stocks that are unloved, but which later do well in the upswing. Apart from these adjustments, this is not the time to become outright defensive as the early stages of a new equity cycle is upon us.
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