World stocks have all but completed the much vaunted “V-shaped” recovery from the pandemic shock, anticipating a substantial healing of the global economy over 12-18 months. But discrimination between markets is now increasing.
The blanket return to equity is well advanced despite still-rising global infection numbers, as investors continue to bet on a vaccine arriving in 2021.
Aiding the bounce, massive government support and central bank stimulus have floored borrowing and discount rates, further boosting equity return premia relative to bonds, and channelling investors into stocks on the old maxim of TINA – “there is no alternative”. That’s especially so with interest rates likely to remain near zero now for years to come to keep the mountainous new government debts affordable.
The wave of global liquidity has therefore lifted pretty much all boats since the low watermark of March. MSCI’s all-country stock index hit its highest level since Feb. 24 on Tuesday – now just 4% from record peaks set just 107 trading days ago, and a rise of almost 50% from the March trough.
Wall Street
Taking a six-month view in dollar terms, that picture is broadly replicated by Wall Street’s S&P 500, Germany’s DAX, Japan’s Nikkei, and even wider euro zone and emerging market aggregates.
China, first in and out of pandemic lockdowns, has outperformed and vanguard stocks of the red-hot tech and pharma sectors have stormed ahead globally to new records. Britain’s Brexit-hobbled FTSE 100 blue-chip and FTSE 250 mid-caps remain standout laggards of the major markets – almost 20% shy of the rest over the six-month period.
But with total global contagion numbers still rising despite easing lockdowns, it’s this regional discrimination that’s now main focus of the major investors going forward – riffing off relative success in controlling the virus, varying degrees of political risk, and “de-globalization” into a more fragmented world economy.
Over the past month alone, Chinese and German benchmarks have led the charge higher, with gains of more than 10% – twice that of the percentage-point gain in the S&P 500.
Many funds have already been overweighting European stocks into the second half of the year – a bias aided by the European Union’s eventual agreement on Tuesday of a 750-billion-euro ($860 billion) stimulus focused on digital and green investments – by far the dominant investment themes of the era.
Europe different
BlackRock’s team stressed their European preference on Monday as “the most attractive regional exposure to a differentiated global reopening”.
With several U.S. states struggling to control the virus and many emerging markets with less robust health systems also enduring persistent and alarming COVID-19 outbreaks, BlackRock posited Europe many be best placed to gain from a global recovery.
It contrasted Europe with emerging markets, in particular, as the latter would typically be the destination of choice in a rapid global upturn. But it reckoned the nature of Europe’s coronavirus response meant European companies may be better placed to take advantage of China’s advanced rebound and less vulnerable to commodity price hits.
“We are overweight European stocks due to the region’s strong public health systems and ramped-up policy response,” it told clients. “We are underweight EM equities outside North Asia due to the pandemic’s spread and limited policy space.”
BlackRock is far from alone in that respect.
“Until the virus is under control, from a regional perspective we continue to favor countries that have been dealing more effectively with the outbreak. This means looking at North Asia and Europe,” Fabiana Fedeli, Robeco’s global head of fundamental equities, said on Tuesday.
Of course this discrimination between regions owes a lot to wariness about Wall Street’s market leadership, U.S. equity valuations and the dollar going into November’s presidential election – a contest that itself could be heavily influenced by the effectiveness of the nation’s virus-control measures.
Some betting and prediction markets have incumbent President Donald Trump trailing Democrat candidate Joe Biden by more than 20 points, at least partly as a result of concerns about Washington’s pandemic response and how income benefits support will be sustained.
And the extent to which that matters to market players was amply illustrated this week by a UBS survey of about 4,000 investors and business owners from around the world.
Some 55% now expect Biden to win the White House race and more than 60% said they plan to adjust their portfolios based on the outcome, regardless of who wins.
As revealing was that 60% and 53% of Asian and European investors respectively were optimistic about their own stock markets over the next six months. Only 44% of U.S. respondents thought likewise about their domestic equities.
