Since April the markets have seen a relief rally after the historic correction in equities, the Dow Jones, S &P 500, the Swiss and the Eurostocks 50 indexes posted their best monthly performances in the last 30 years. From the bottom some of these indexes are up around 30%.
This has been a technical rally: investor’s optimism has been fueled by hope governments lifting lockdowns and relaxing restrictions which curb the spread of the coronavirus pandemic. The development of an effective vaccine before the year-end has been also a factor behind the markets strong recovery.
Until now, investors have refused to see the damage that is occurring to the world economy. The real extent of this damage will become more apparent at the beginning of the second-half 2020. Corporate results, company’s downgrades and perhaps bankruptcies will bring a sour mood to the markets.
We have probably seen the bottom of the markets and we don’t share an apocalyptic view of the global economy. But it will take some time during this deep recession, not quickly, to see the economic indicators- production, consuming, employment, trade- going back to normal. The covid-19 disease has taken a huge toll on global economic activity.
We advise cautiousness. The fear of missing out the market can be dangerous. We advise to keep our portfolio level of risk low, at the same time to take advantage of a very high volatility to build up value positions.
Quarterly Economic Environment and Outlook
Basel, Q2-2020 (April 2020)
Growth in Switzerland will decline sharply in the first half of 2020. A deep fall of external demand will have a very strong impact on the economy. German manufacturing is collapsing with a negative effect across Europe and Switzerland. The Swiss franc remains a concern, the central bank is trying to mitigate the effects of a strong currency. The main concern is the coronavirus pandemic across the world.
The US economy will fall sharply in the first and second quarters of 2020. Consumption is declining, the labour market conditions are deteriorating very fast, the savings rate is not improving. House prices are stable but residential investment will contract. Short-term rates will remain very low, growth forecasts are very pessimistic. The corporate sector is under pressure, earnings are expected to collapse. A contraction of growth in Europe will hurt export-oriented companies. This scenario is extremely negative, but the combined weight of emergency fiscal and monetary measures should alleviate economic pain and allow a sustained rebound in the second half of 2020.
Industrial production is falling. Growth rates will decline, most countries are still challenged by public debt financing. In Germany, the employment barometer has fallen by a record amount and manufacturing companies are planning to reduce workers. Exports and services decline in France, Italy, and Spain raise intense pressure on the governments to continue to add fiscal stimulus. The ECB has made clear its willingness to act without limits, the era of quantitative easing will go on for a long time. Interest rates will remain at very low levels. In the UK, the Bank of England put a new monetary strategy to finance the country’s response to the pandemic.
The government in Japan is pushing for more growth and the central bank, with its negative interest rate policy, has pledged to expand asset purchases, buying bonds and treasury bills. The public debt is already very high. The economy is stalling, private consumption and public investment weaker. A strong competitive yen increases corporate pessimism. In China, exports are declining more than expected. The economy and domestic demand remain under strong pressure. In India, the new government continues to implement policy changes designed to improve growth.
|CHF||Stable, due to its role as a safe haven currency. The SNB will continue to sell Swiss francs to avoid a further appreciation.|
|USD||Volatile, could weaken.|
|EURO||Volatile, could rise.|
|JPY||To remain stable, likely to soften again if there is bank intervention.|
|Gold||Firm, benefiting from continuing economic and geo-political uncertainties.|
The aforementioned Economic Environment and Outlook shall not constitute a recommendation or an investment advice. It is not the result of any financial analysis and the “Directives on the Independence of Financial Research” issued by Swiss Bankers Association does therefore not apply.