The course of COVID-19 continues to influence the path of the global economic recovery. Most countries were in V-shaped recovery mode during the third quarter. Those that had the harshest experiences and the most restrictive lockdowns have generally experienced the strongest recoveries.
Jim Solloway, Chief Market Strategist of SEI’s Portfolio Strategies Group, addresses central bank efforts to support the global economy, the expected impact from the successful creation of virus vaccines, the response of governments to the impairment of their fiscal positions and the implications of global politics.
Jim Solloway’s Economic Outlook
Hello, I’m Jim Solloway, Chief Market Strategist and Senior Portfolio Manager in SEI’s Portfolio Strategies Group. When I last spoke to you, the COVID-19 pandemic and the huge rebound in equity prices were the top stories. Today, COVID-19 remains in the news as a second wave of infections has already emerged in parts of the world and threatens to hit the Northern Hemisphere hard during the fall and winter.
Economically, the course of the virus continues to influence the path of the global recovery. Most countries were in V-shaped recovery mode during the third quarter, coming sharply off their low points in May and June. Those that had the harshest COVID-19 experience and the most restrictive lockdowns have generally experienced the strongest recoveries.
Inflation-adjusted gross domestic product, which is referred to as real GDP, measures the value of all goods and services produced by an economy in a given year. Looking at the year-over-year change through June 30, 2020, as well as the expected outcome for full-year 2020, we can see that China and Taiwan were two of the only countries in the world to post positive year-over-year gains through the second quarter. China also is the only country to post a gain in the second quarter itself, after having lagged the rest of the world in the prior quarter due to having the most stringent lockdown during that period.
South Korea, Indonesia and Australia posted only moderate declines in GDP over the four-quarter period. These countries also contained the virus to a more manageable degree than many other parts of the world.
The picture is much different in emerging economies. Contractions have been truly stunning in Peru, India, Argentina and Mexico. Among developed nations, the U.K., Spain and France have taken notable hits. The U.K. has the added burden of Brexit concerns, which have returned as the deadline nears for the country to reach a deal with the EU about the terms of their relationship. Obviously, a hard Brexit will not help matters. But the worst impact potentially will be sustained by financial companies and other service-producing entities that don’t produce tradable goods.
Canada is running in the middle of the pack with the U.S. faring somewhat better but still far below pre-pandemic levels.
The question, now, is “How long will it take to get back to more normal levels of economic activity?” The world is not out of the woods, to be sure. There has been a surge in new cases in India, severe outbreaks on college campuses in the U.S., and a new round of lockdown restrictions and mask-wearing rules in Europe and the U.K.
We doubt there will be a full return to normal economic behavior until safe and effective vaccines are introduced and distributed globally. We think it is realistic to assume that a few different types of vaccines will be generally available by this time next year. Social-distancing measures will likely be recommended well into 2021 and, probably, into 2022.
Meanwhile, election-year politics in the U.S. have amped up an already-heightened level of social discord, complicating the medical and fiscal responses to the pandemic. Regardless of this Presidential election’s outcome, our bias is to assume that both candidates would see their platforms tempered before being put into practice. We are always less concerned about who holds a nation’s highest office and more concerned about economic fundamentals.
Looking ahead, recent and anticipated regime changes taking place in distinct but connected universes—including political, economic, medical and financial spheres—will likely come into play.
Specifically, central bank efforts to support the global economy by keeping interest rates low and providing other means of assistance, the impact stemming from the successful creation of virus vaccines, the response of governments to the impairment of their fiscal positions and the implications of global politics are all intertwined. In environments of such uncertainty, we believe it is important to maintain a risk-aware approach to wealth management through prudent planning that focuses on companies with strong fundamentals and reasonable valuations.
Accordingly, SEI’s equity managers are generally positioned for a rotation into sectors and markets that have lagged sharply in recent months. While sticking with value stocks can be difficult, we believe that valuations matter—the U.S. large-cap market appears expensive.
A rotation away from large-cap growth stocks into other types of equity investments might coincide with early signs that the COVID-19 infection rate is subsiding as one or more vaccines become available to the general public. Increased investor confidence that the world is getting back on track should greatly reduce the relative appeal of the most expensive stocks in the market place.
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