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Ok. Got itThe International Monetary Fund revised its global growth estimates for 2020 down to 4,9%, with global debt reaching an estimated 101% of GDP. Read our latest market review.
It has been a strong quarter for risk assets, especially equities and credit. Although there is certainly some merit to the exceptional rebound, the speed and magnitude, alongside weaker fundamentals, are leaving most investors questioning the longevity of this seemingly engineered ride. The S&P 500 gained +2,0% in June, bringing returns over the quarter to a staggering +20,5%. Much of the rebound can be ascribed to technology and healthcare stocks, as illustrated by gains in the technology heavy Nasdaq index, which gained 30,3% over the quarter. The MSCI World Index ended the quarter up +19,5%, supported by a rebound in emerging markets of +18,2%. On the other side of the spectrum, US Treasuries gained about +9% year to date while gold is up close to +18%. The tide of stimulus and easing of lockdowns helped lift all boats, engineering a recovery that is unlikely to be as swift in the real economy.
The International Monetary Fund (IMF) revised their global growth estimates for 2020 down to -4,9%, with global debt reaching an estimated 101% of gross domestic product (GDP). Even though activity indicators are improving, most are still well off pre-crisis levels. Policymakers and central banks continue to make cautionary noises, with the US Federal Reserve all but committing to keep interest rates close to zero through 2022. Rebuilding economies will, however, require both lending and spending. Near-term fiscal support measures are rolling off and may need to be extended in some countries as the impact of the crisis persists or risks potential social unrest. Looking further out, leaders are increasingly promoting the idea of infrastructure programmes as part of a revival, with president Donald Trump proposing a considerable $1tn infrastructure package for the US over several years. UK prime minister Boris Johnson’s recovery plan or 'New Deal' includes the acceleration of a £5bn investment in roads, schools and hospitals while the EU recovery fund (should this be agreed) will likely include infrastructure as one of the investment priorities. Many a political promise has been sold on the back of infrastructure investment, but getting the fiscal packages approved will require political fortitude as well as funding. The latter has tended to be the point of contention and will be no easier conversation now that the world has become even more indebted.
Evidence of a second wave of Covid-19 infections have appeared in various regions, including China. Although this has led to a localised response by most governments and rather skittish market participants, we have yet to see a decisive move back towards economy-wide lockdowns. Even in the US, which has arguably handled the crisis in a less decisive fashion, decisions in high infection states have been left to state governors and even cities rather than reintroducing nationwide measures. The worse effected states, including Texas, Florida and Arizona, have stopped the easing of lockdown measures, reinforcing a lockdown of bars, gyms and restaurants. Time will tell how meaningful or persistent the re-escalation of infections is, but for better or worse, the world appears to have opted to rely on the experience and capacity built up to date, a more localised and varied response and self-regulation by their people.
China enacted the controversial national security law for Hong Kong, prompting condemnation from the US, Europe and Australia. With China firming its grip on Hong Kong, the 'one country, two systems' framework, which has long underscored the constitutional independence of Hong Kong and the rule of law, seems to be not only threatened but dented. Physical and financial emigration had increased since the pro-democracy protests last year and look set to increase with the UK offering a 'pathway to future citizenship'. The US has suspended Hong Kong’s preferential trade privileges and passed a sanctions bill, increasing tension and possible further collateral damage for Hong Kong.