While the COVID-19 pandemic represents a very significant challenge for the global economy, the equity risk premium (excess return over risk-free assets) remains attractive amid lower developed market government bond yields.
Substantial policy easing and reduced spread of COVID-19 have reduced downside tail risks
US policymakers have acted in a timely and coordinated manner, with the US benefiting from significant economic, medical, and technological resources to fight the outbreak. Corporate earnings have also been outperforming other regions, and exposure to big tech companies has been beneficial
There are ongoing political challenges to significant co-ordinated fiscal policy support, while the ECB is pushing against the limits of its mandate. This is in the context of the eurozone’s weak pre-crisis economic performance, the risk of a hard Brexit later this year, and the potential for government pressure to maintain low dividends during the crisis
Nevertheless, prospective risk-adjusted returns are attractive in our view. The ECB has so far been proactive and innovative in its policy approach, while the German government has engaged in very significant fiscal easing. Case growth is under control in most countries
The UK equity risk premium (excess return over cash) remains comfortably above that for other developed market (DM) equities
The UK government and the Bank of England (BoE) have implemented a comprehensive and coordinated package of economic stimulus measures aimed at supporting businesses and employment
Policy support is constrained relative to other countries by already ultra-low interest rates and a high government debt level. Meanwhile, Japan’s economic growth was very weak prior to the COVID-19 outbreak
However, valuations are very attractive, in our view, while Japan (along with other industrialised Asian economies) has made good progress in tackling the spread of COVID-19
Valuations are broadly similar to DM equities. In our view, the bright spot is EM Asian markets which can benefit from China’s growth recovery and further policy actions
Ultra-loose Fed policy and lower oil prices are significant tailwinds to many EM economies
Low commodity prices is a major headwind to already weak growth momentum in Latin America and Russia. CEE economies are vulnerable to a manufacturing slowdown in Europe given supply chains
Many EM economies (mainly outside of Asia) have limited capacity to manage the current health and economic crises. COVID-19 case growth remains on an upward trend in a number of Latin American countries
Source: HSBC Global Asset Management. As at 1 July 2020. The views expressed were held at the time of preparation, and are subject to change.
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