A viral stress test in the midst of a global recovery - Dorval's Macro Corner (July2020)

"Adapting economic knowledge to market realities and breaking free from the tyranny of indices"
François-Xavier Chauchat
Member of the Investment Committee. Macroeconomic framework and asset allocation.
The process of upward revision to economic growth has started. Household consumption resumed more quickly and more decisively than expected when economies reopened, and continued very high household savings rates mean that significant potential for additional growth remains.

However, this recovery is hampered by redundancy plans announced in sectors that have been most affected by the epidemic, as well as the need for many companies to rebuild their margins, along with the fact that the virus is still around. This is why support plans will be extended and stimulus programs strengthened.
 
The resurgence of Covid-19 cases in the United States since the beginning of June is a major stress test for constructive scenarios. The hefty upsurge of new cases in some states has been accompanied by a smaller increase in hospitalizations, and an even lower rise in deaths. The virus transmission rate has increased to slightly above 1, but remains far below March levels (above 2). It is therefore not impossible that partial and targeted lockdowns, as well as a more systematic use of masks will be enough to stem this wave. This would be great news for the economy, but it still remains to be proven, and this is one of the challenges of the summer for investors.
 
Vast uncertainties remain on the real level of unemployment, as it is difficult to measure figures due to supply restrictions and the impact of support plans on employment statistics. In the United States, the official unemployment rate came to 11% in June, which is high, but surveys of American households show a much lower level of job deterioration so far. In Europe, where unemployment has been concealed behind job retention schemes, real unemployment figures are starting to emerge. In Germany, stats stood at 6.4% in June – the highest level in five years – but this figure should be able to stabilize or even drop by the end of the year on the back of the massive stimulus plan decided by Berlin (130 billion euros). More stimulus packages are also expected to be decided in the United States and in Europe this summer.
 
Positive dynamics of the stock markets were slowed at the beginning of June by the sharp acceleration of virus cases in the United States. However, the bull market continued in China, where the euphoria of the Shanghai stock market is somewhat suspicious—unless this euphoria illustrates what could happen to global cyclical and financial values ​​if the process of economic normalization were confirmed? In any case, global cyclical sectors remain very undervalued, both in absolute and in relative terms. They generally perform well in the first two years of a recovery. In the current context, this should particularly apply to the construction sector, which benefits from both cyclical and structural support, i.e. the reopening of the economy of course, but also its prominent position in fiscal stimulus plans, and its role in energy transition programs in Europe (“Green Deal”) and elsewhere. In our global funds, we have invested in a basket of around twenty European, Asian and American stocks in this sector over the mast several weeks.

 

 

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