Mike Pyle, Global Chief Investment Strategist together with Elga Bartsch, Head of Macro Research, Kurt Reiman, Senior Investment Strategist for North America and Tara Sharma, Member of the Macro Research team, all part of the BlackRock Investment Institute share their insights on global economy, markets and geopolitics. Their views are theirs alone and are not intended to be construed as investment advice.
Global stocks have recovered more than half of the selloff triggered by the coronavirus pandemic since late March – alongside a sharp contraction in economic activity and corporate earnings. We see the unprecedented policy response to cushion the pandemic’s blow as key to support global equity markets – against a backdrop of historic uncertainty for activity and earnings. We still prefer an up-in-quality stance and like economies with ample policy room as we stay neutral on global equities overall.
Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index. Sources: BlackRock Investment Institute, with data from Refinitiv, as of May 14, 2020. Notes: The bars show the breakdown of each market’s total return into dividend, earnings growth and multiple expansion. The dots show each market’s total return since March 23, 2020. Earnings growth is based on the change in the 12-month forward I/B/E/S earnings estimates since March 23, 2020. The indexes used are the MSCI index for each regional market, and the MSCI ACWI Index to represent the global market.
Global equities found their footing in late March – thanks to a swift and overwhelming fiscal and monetary policy response led by the U.S. Yet under the hood of the impressive rally lies a large dispersion in regional and style factor performance. The chart above zooms in on the sources of total return in key regional stock markets during the rally: The U.S. and Asia ex-Japan markets have outperformed broad emerging markets, the euro area and Japan – and this aligns with our overweight in the two frontrunners. An expansion of valuation multiples from cheaper levels has driven the rally across markets, even as earnings expectations contracted across the board. Lower-for-longer interest rates mechanically increase the present value of estimated future cash flows, making equities more valuable – and also relatively more attractive on cross-asset basis.
A key feature of the equity market rally is its narrowness. The outperformance of U.S. equities so far this year is largely a function of strong gains by a handful of mega-cap technology stocks, extending a multi-year trend. The five companies with the largest market value in the S&P 500 Index account for over 20% of the index’s total market capitalization. This is the highest since the tech bubble in 2000 – and potentially a warning sign. Yet these market leaders – with businesses in e-commerce and online search – are poised for better earnings as they have strong long-term growth prospects, robust financial metrics, and business models benefiting from pandemic-spurred behavioral shifts. In contrast, cyclical sectors such as energy, financials, consumer discretionary and industrials, have reported poor earnings – and challenging outlooks.
The bottom line: We still hold an up-in-quality stance in equities. This includes a preference for the U.S. market’s relatively high concentration of quality companies and sectors set to ride long-term structural growth trends. We also favor Asia ex-Japan on the expectation that many countries in the region, especially China, have more policy room and have demonstrated their strength in containing the virus spread. We are underweight the euro area and Japan, as they are more dependent on foreign trade and have less willingness or capacity to engage in policy stimulus. From a factor perspective, we still favor exposure to quality and minimum volatility for their relative defensiveness during periods of slowing economic activity and heightened volatility. We stay underweight on value – a factor that typically fares poorly during periods of decelerating growth and has extended its underperformance of the past three years.
Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index. Sources: BlackRock Investment Institute, with data from Refinitiv Datastream, May 2020. Notes: The two ends of the bars show the lowest and highest returns versus the end of 2019, and the dots represent year-to-date returns. Emerging market (EM), high yield and global corporate investment grade (IG) returns are denominated in U.S. dollars, and the rest in local currencies. Indexes or prices used are: spot Brent crude, MSCI USA Index, the ICE U.S. Dollar Index (DXY), MSCI Europe Index, Bank of America Merrill Lynch Global Broad Corporate Index, Bank of America Merrill Lynch Global High Yield Index, Datastream 10-year benchmark government bond (U.S. , German and Italy), MSCI Emerging Markets Index, spot gold and J.P. Morgan EMBI index.
Fiscal and monetary policy action to bridge the economic impact of the coronavirus has taken shape – and now the priorities are 1) policy execution to ensure households and businesses actually receive the pledged funding; and 2) avoiding policy fatigue before the shock has passed. The U.S. administration, meanwhile, appears to be making a calculus between the perceived political benefits of being tough on China and the risk of renewed stock market volatility. Markets have so far largely looked through a string of dire economic data, with risk assets rallying from March lows.
- Tuesday: ZEW Indicator of Economic Sentiment
- Wednesday: Euro area flash consumer confidence indicator
- Thursday: Flash composite purchasing managers’ index (PMI) for Japan, the euro area and U.S.; Philly Fed Manufacturing Business Outlook Survey
- Friday: China’s National People’s Congress annual session starts; UK retail sales
This week’s slew of surveys could help gauge sentiment among businesses and consumers on the impact and duration of the virus shock. Markets will also focus on the delayed annual meeting of China’s top legislature – with expectations for more relief measures to be announced – as the country is in the early days of thawing its economy from the freeze caused by the lockdown measures to combat the outbreak.
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