Global Investment Strategy Q3 2020: A start to economic healing

Key points

• To date, the recovery in activity has been V-shaped. Going forward, a swoosh or square root path seems more likely, as economies work to recoup their residual potential over the coming quarters and into 2021.
• After signs of a sharp recovery early on, the US outlook has become more challenging recently, with healthcare policy mistakes leading to a resurgence in infections in a number of states.
• Policy response was initially uneven in Europe, but fiscal and monetary measures have since been upsized and expanded, resulting in a more complete policy framework – as required to deal with this unprecedented crisis.

• Once at the centre of Covid-related turmoil, China now finds itself in a relatively stronger position to navigate the 2^nd half of 2020, thanks to its success in containing the virus.
• In Japan, while the relative intensity of voluntary social distancing measures has depressed activity, successful containment of the virus also bodes well for the 2^nd half economic rebound.

• When it comes to managing potential upcoming volatility episodes, we believe portfolio resilience is key. Investors can achieve this by striking a judicious balance between a slight underweight in equities and the holding of portfolio protections, such as US Treasuries, the yen, gold and, when adequate, put options on equity indices.
• In currency markets, a number of positive news from Europe, including on the Covid-19 front, have served to trigger the long-awaited dollar correction.

Managing post-crisis market conditions

• Throughout the March-April period of maximum volatility, we chose to maintain our equity exposure, a decision that paid off in absolute terms when equities proceeded to outperform other asset classes during the post-crisis bounce.
• Markets are taking a very optimistic view of the shape of the economic recovery, already pricing in a return to pre-Covid-19 earnings and trading multiples by the end of 2021. This sets a high bar for further positive catalysts.

• Directionless equity markets, slow growth expectations (beyond the ongoing economic recovery) and capped yields lead us to recommend moving back to carry strategies. More specifically, we raise our stance on high-yield bonds to overweight.