Solid comeback for equities – but no room for complacency

Chief strategist Henrik Drusebjerg looks back on an extremely turbulent first half-year on the financial markets and outlines his expectations for the rest of 2020.

The corona crisis made the first half of 2020 a testing time for investors, with eye-watering price falls on both equities and many bonds – and since then a solid comeback that has enabled investors to recoup a significant portion of their losses.

We asked Danske Bank’s chief strategist, Henrik Drusebjerg, what investors can expect in the second half of 2020.

“We still expect the recovery in global economic activity to continue as societies reopen and we gradually return to normality. The huge economic assistance packages enacted by many governments and central banks around the world provide a solid foundation for getting growth up and running again, though we are unlikely to reach pre-corona levels in 2020,” he says.

What does Danske Bank expect lies ahead for the financial markets in H2?

“Given the significant increases in equity prices since March, investors have already factored in much of the assistance packages and reopening of societies around the world – and indeed a pessimist might say that the increase in equity prices has perhaps happened a little too quickly. That is why there is no room for major disappointments in the time ahead. We must see economic growth, but we are expecting that to happen, so we still see room for further increases in equity prices. We therefore have a slightly higher share of equities in our portfolios than we expect to have in the long term, while we, in contrast, have a slightly lower share of bonds.”

How concerned are you about a so-called second wave of coronavirus infections?

“Naturally, that is a considerable risk factor, and at worst could presage a major setback for the global economy and financial markets. Indeed, we have had a couple of forewarnings in June, with new clusters of infections in China and Germany, for example, after these economies began to reopen. Moreover, the coronavirus is still not under control in many parts of the world, perhaps most notably some South American countries and certain states in the US. However, we generally expect that politicians and populations have learned important lessons and are in a better position to handle any second wave more effectively. Meanwhile, considerable progress has been made in the treatment of coronavirus and we appear to be getting closer to a vaccine.”

What other risk factors do you see on the horizon?

“Both the ongoing Brexit saga and the trade war between the US and China are political risks that could suddenly flare up again. Furthermore, considerable uncertainty surrounds economic growth and corporate earnings for the rest of 2020 because of the coronavirus and the reopening process. The next US reporting season kicks off in mid-July, and it could reveal that some company and sector prices have increased too much in recent months relative to what actual economic growth so far would justify. Moreover, how hard individual companies have been hit by the coronavirus may vary greatly, depending on which markets they sell to, which could potentially result in considerable market volatility over the summer.”

You apparently see a good many risks ahead – why are you nevertheless maintaining a modest overweight in equities?

“True, there are many potential risks. Nevertheless, we at Danske Bank are confident the global economy will move in the right direction when looking six months to a year ahead. What we are more uncertain about is the pace of recovery and what pitfalls may open up along the way.

“Politicians and central banks remain key players who will help support economic growth. For example, the US central bank, the Fed, has now begun to buy up corporate bonds to support funding opportunities for companies, while the European Central Bank has increased its limits for bond buybacks to ensure liquidity and to keep interest rates low.

“Finally, the expected return from the alternative – in other words, bonds – is extremely limited. Yields on many bonds are very low or negative, and as we also expect yields to rise slightly as the economy recovers in the next 6-12 months, that will further erode return potential, as rising yields are synonymous with falling bond prices.”

What has surprised you most about the corona crisis so far?

“That it happened at all! At the start of the year, no-one had imagined such a far-reaching global viral crisis was in the offing, even if the crisis has subsequently progressed largely as we expected once it had broken out – in other words; first, a severe economic slowdown followed by a gradual recovery. That being said, the downturn was more pronounced than we initially envisaged, though the recovery has also been relatively swift and much of the lost ground has been regained. Nevertheless, investors should not feel complacent because of recent progress. New setbacks are almost inevitable in the coming months – just as we have experienced in June, when equities have dipped several times on the back of resurgent fears over the direction of the coronavirus.”

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