First came the coronavirus and the lockdown of large parts of the economy, quickly followed by huge economic assistance packages from the politicians and central banks – and now we have entered a phase where global economies are starting to reopen.
Since bottoming out on 23 March, global equities have recovered close to two thirds of the ground they lost, so from here substantial progress is probably required on the economy and the coronavirus if we are to see further significant price increases, says Danske Bank’s chief strategist, Henrik Drusebjerg.
“Investors have already priced both the large assistance packages and the expected reopening of economies into equity prices, while there is great uncertainty on just where the economy will be six months from now,” he states in Danske Bank’s new quarterly report, Quarterly House View, which looks at global economy and current investment opportunities and risks in the financial markets.
Despite the uncertainty and the significant price rises since bottoming out in March, Henrik Drusebjerg maintains that investors should not be unduly negative and cautious in their investments.
“There is no doubt that we will gradually see a pick-up in economic activity as economies around the world reopen, and while investors have already partially priced in some of that progress, we nonetheless expect to see reasonable increases in equity prices in the slightly longer term as the economic recovery gradually takes hold. Over 12 months we expect a return from global equities in the range of 2-6%,” he says.
At Danske Bank, we are therefore maintaining an overweight in equities – in other words, we have a higher share of equities in our portfolios than we expect to have in the longer term – while we have an equivalent underweight in bonds. However, we are not blind to the uncertainty prevailing at the moment, so our overweight in equities is modest.
Many risks remain
As well as the great uncertainty surrounding just how quickly and strongly the economic recovery will take hold, the risk of a second wave of coronavirus outbreaks lies not far below the surface, while corporate earnings in 2020 are also subject to great uncertainty.
“As an investor, it is difficult to determine whether or not the falls in equity prices since the market peaked in February reasonably reflect the downturn in corporate earnings,” says Henrik Drusebjerg.
Moreover, considerable political risks exist that could trigger further market turmoil – not least the trade war, where the rhetoric between the US and China has been ratcheted up of late, while Brexit uncertainty could also flare up again. The EU and the UK must soon agree the terms of their future relationship if the UK is to exit the EU as planned at the end of 2020, when the current transition period expires.
Return potential outweighs risks
However, the corona crisis is the all-dominating factor at the moment, yet while the crisis has hit the economy extremely hard, Henrik Drusebjerg expects we can avoid an extended economic recession.
In contrast to the financial crisis, for example, the chief strategist points out that the corona crisis has not been triggered by a deeper structural crisis founded on major economic imbalances that require a painful period of economic adjustment. Moreover, politicians and central banks have moved faster and further than during the financial crisis – and this may also help encourage the economy to more quickly shift up a gear and get many of the recently jobless back to work.
“While further setbacks in equity markets are almost inevitable, we estimate the potential from equities in the slightly longer term will more than offset the short-term risks,” he says.