MacroResearchBoard

Prepare For A Bumpy Re-Start – April 20, 2020

A growing list of countries are preparing to re-open their economies. The good news is that the number of new active infections is slowing markedly in many countries, to the point where there are now more countries witnessing a deceleration or even contraction than those still suffering an acceleration in COVID-19 cases.

However, on the bad news side of the ledger, there are uncertain odds of a smooth, even if gradual, re-starting of economic activity. Some early-responding countries are trying to re-start, but with mixed results. For instance, although Singapore has a unique problem in terms of its foreign labor force, the lesson from its huge second wave of cases is that extensive testing and continued quarantining are needed until treatments and/or a vaccine are found. Absent the latter, a smooth return to normal economic activity is unlikely.

A just-published report from MRB discussed the challenges ahead, and noted that global equity markets were becoming vulnerable, as the outlook for corporate profits is likely to remain very uncertain for longer than is currently discounted. We are maintaining a neutral weighting in stocks within a global multi-asset portfolio, with a strategy of gradually augmenting holdings in favored sectors/markets on weakness, as a test of the March lows cannot be ruled out. Conversely, we remain overweight credit: the narrowing in spreads has slowed, but we expect significant further narrowing over the next 3-6 months, backstopped by open-ended policies at the major central banks.