The Covid-19 pandemic represents a very significant challenge for the global economy. However, we believe the equity risk premium (excess return over risk-free assets) remains attractive amid lower developed market government bond yields
Substantial policy easing has reduced downside tail risks
We believe the market is pricing in our baseline economic scenario of a “swoosh” recovery, although there are some tentative signs of the more optimistic rapid recovery scenario being discounted
Exposure to big tech companies is also beneficial in our view
The EU’s new joint recovery fund can help support the medium-term growth prospects of more vulnerable European economies
We also think the fund should help diminish the risk of more economically fragile member states exiting the Eurozone, which can help compress the “political risk premium” we believe is embedded in the pricing of European risk assets
Furthermore, the ECB has so far been proactive and innovative in its policy approach
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
Japanese equities are attractively valued although low structural growth and constrained BoJ policy space means we hold a neutral view
Japan (along with other industrialised Asian economies) has made good progress in tackling the spread of Covid-19
We estimate 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
Source: HSBC Global Asset Management. As at 1 September 2020. The views expressed were held at the time of preparation, and are subject to change.
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