Just six months ago, global equities plunged more than 30% – yet, equity markets have now largely recouped their losses.
Price increases were initially driven by the extremely accommodative monetary policies of the central banks, followed by massive fiscal relief packages. Recent months have seen a noticeable pick-up in economic activity and improving labour markets, so we can conclude that the global economic recovery is on course, according to Danske Bank’s chief strategist, Henrik Drusebjerg.
Moreover, the coronavirus appears to be controllable using more targeted and local measures than the total lockdowns we saw in the spring.
“Our main scenario is therefore one of further solid economic growth in the coming year that will gradually approach pre-corona levels, while an effective vaccine against the coronavirus will presumably support this positive trend once it becomes available. We therefore still see potential for further equity market growth and are maintaining a modest overweight in equities – in other words, we have slightly more equities in our portfolios than we expect to have in the long term,” says Henrik Drusebjerg in Danske Bank’s new quarterly report, Quarterly House View, which considers current investment opportunities and risks.
However, we are not blind to the risks that could derail growth and the positive mood of investors, and progress will not be plain sailing, points out Henrik Drusebjerg.
“Setbacks are more or less inevitable – for example, during periods of disappointing economic data or new waves of lay-offs as companies adjust to a new reality,” he says.
With respect to risk, coronavirus is of course still centre-stage. While we do not expect a repeat of this spring’s total lockdowns, new and extensive virus outbreaks in the autumn could still put a damper on growth and inflict further damage on the economy.
“Furthermore, financial markets are likely to be very sensitive to economic trends. Should growth appear to be running out of steam, market sentiment could swiftly turn negative, and given how much positivity has been priced into equities since they bottomed out, there is no room for major disappointments. On top of this come risks such as Brexit and a potential flare up US-China trade tensions,” explains Henrik Drusebjerg.
The less risk, the better
On the other hand, we may not need major positive surprises to maintain the buoyant mood among investors. Where the economy will be in just a few months, never mind a half or whole year, is still very uncertain – but every data point that confirms the economic recovery is on track will reduce this uncertainty a little, which is positive in itself.
Despite the risk of a setback for the economy or the financial markets, Henrik Drusebjerg, as outlined, clearly expects to see the potential for further economic growth realised – though he is more uncertain about the pace and the level of volatility along the way.
“Nevertheless, we would like to see further confirmation of the economic recovery and less uncertainty before considering a further increase in our equity overweight,” he states.