News & Insights
MARKET CONTEXT: Financial markets show resilience despite a deteriorating pandemic and geopolitical situation
Global Macro: China is the first major economy where the Covid-19 pandemic has virtually ended and a clear economic recovery is under way. As a result, it is the only major economy that could end the year with slight positive growth in 2020, potentially +1%. For the rest of the world, the situation is seemingly aggravated with a pandemic peak in some parts of Europe, the US, and emerging countries. Trump’s Covid-19 contamination adds uncertainty to the presidential election outcome and to the schedule of the additional fiscal stimulus to be voted in the US.
Financial Markets: Equity markets sold off globally in September (S&P 500 -5.6%) before stabilizing as investors bought the dips. The market resilience can be attributed to the fact that investors believe the economic stimulus from the US government will be approved and the Fed will maintain its accommodative stance amid the pandemic. We believe the market will unlock its upward potential when an effective Covid-19 vaccine is rolled out. Most investors are not positioned for the economic recovery and high levels of cash are still on the sidelines. We think this situation is rather positive for the equity market in case of positive news regarding both clear US election results and the end of the pandemic.
Equity: Month to date the S&P 500 lost 5.6%, Euro Stoxx 50 -2.6%, Hang Seng -6.8%. Fixed Income: 10-year US yield decreased 5bps in September to 0.65%. Emerging market government bonds dropped 3.1% in USD and 2.8% in local currencies. High-yield corporate bonds were down 2.7% in EUR and 2.2% in USD. Currencies: USD strengthened in September: EUR -2.0%, CNY +0.5%, AUD -3.6%; safe haven JPY +0.3%, CHF -2.2%. Commodities: Oil and gold prices contracted: WTI Oil -9.3%, Gold -4.4%.
Opportunity: The HSCEI (Hang Seng China Enterprise Index) trades -16% YTD and 30% below its 2018 level, due to the US-China tensions and Hong Kong unrest. However, the index component companies have their main activity in mainland China. Moreover, the index is progressively being reshuffled as the proportion of Tech stocks, currently representing 10% of the index, goes up to 30% in the coming months as a number of Chinese Tech companies are now using Hong Kong as their sole listing or alternative listing to the US. We believe the low valuation of the index, its high dividends, and the growth potential of the new joiners will underpin its price appreciation.