The month of April saw world equity markets come bouncing back, with a remarkable performance of more than 10% and the best monthly performance by the US markets since 1987! This exploit might well be the result of relative optimism about the major economies opening back up again after weeks of lockdown. That said, there are so many variables that are likely to affect the "return to normal" that it is too soon to declare victory.
April provided the backdrop for an economic meltdown. No economy was spared the lockdown measures intended to limit the spread of the Covid-19 epidemic, and all took a hit from the twin supply and demand shock.
Estimated first-quarter growth figures are already available for some countries. The world’s largest economy, the US, is expected to record annualised negative growth of -4,8%. The eurozone, meanwhile, is expected to post a quarterly figure of -3,8%, with France, Spain and Italy all hovering around -5%.
The economic landscape is largely similar everywhere, with consumer spending, investment and international trade all being affected by the meltdown and an unprecedented collapse in private demand from both households and businesses.
Economic forecasts from leading supranational bodies all indicate that the global recession is severe. The International Monetary Fund (IMF) expects to see the world economy shrink by 3% in 2020, while the European Commission is forecasting a contraction of 7,7% for the eurozone. The World Trade Organisation (WTO), meanwhile, is predicting that international trade will slow considerably in 2020, dropping back by between 13% and 32%.
One thing is for certain: these growth forecasts hinge crucially on how the pandemic develops, how long it lasts, and how deep it cuts. Should the health situation deteriorate further (for example, if approaches to easing lockdown were to fail), these forecasts will very swiftly be revised downwards.
Lack of visibility is unquestionably weighing heavily on the economic outlook. Households face an increased risk of unemployment (something that is already hitting the US, where the ranks of the jobless swelled by nearly 20 million in April) and may tend to postpone their purchasing and investment decisions. It goes without saying that this will in turn impact businesses’ investment decisions.
Lastly, in view of the uncertain climate and expectations that the recovery will be feverish, we continue to favour a neutral positioning between equities and bonds, with a preference for defensive sectors such as healthcare, communication services and utilities.
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