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
Despite the recent rally, we believe the market is pricing in our baseline economic scenario of a “swoosh” recovery. There is no clear sign of “irrational exuberance” in pricing
Exposure to big tech companies is also beneficial in our view
We upgrade to overweight as we believe 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, prospective risk-adjusted returns are attractive in our view; the ECB has so far been proactive and innovative in its policy approach, and Covid-19 case growth is broadly 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
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. COVID-19 case growth remains on an upward trend in a number of Latin American countries
Source: HSBC Global Asset Management. As at 1 August 2020. The views expressed were held at the time of preparation, and are subject to change.
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