The official blog of BNP Paribas Asset Management

Weekly investment update – 15 July

As the global caseload exceeds 13 million and the death toll surpasses half a million people, the coronavirus pandemic is following different trajectories across the different regions.

  • There is encouraging progress in places such as Italy, Spain and Taiwan – a list that includes countries once overwhelmed by the virus.
  • In other countries, the situation is alarming: They include Mexico, South Africa, Russia and Indonesia.
  • In yet other countries, hotspots are reappearing and curbs have had to be re-imposed. In the US, California instituted fresh restrictions. Los Angeles and San Diego ordered schools to start the new term with remote-only classes. Hong Kong and India relaunched pandemic measures.

In the words of the WHO’s Dr Mike Ryan, speaking in the context of Mexico: “This is a pattern we've seen in many other countries… It's very clear from a number of countries that opening in a situation where you have intense community transmission and weak public health response leads to a difficult situation that may push a whole country back.”

The most-populous nations appear to be struggling to contain the virus. The US, Indonesia, Brazil, Pakistan, Nigeria and Mexico, accounting for 37.5% of the global population, all saw COVID-19 cases rise in June compared with May. The challenges these larger nations face include being able to provide enough testing capacity and to change people’s behaviour – at all or lastingly.

The UK was warned of a winter resurgence of new cases, with hospital deaths possibly reaching 120 000 between September and next June. That would be roughly double the current death toll.

The WHO said the pandemic was not under control.

Focal point US: En route to a second lockdown?

The market focus remains on the deteriorating picture in the US. Forty-three states have reported a rise in cases in the past two weeks. Hospitalisations are rising across southern and western states. Indeed, the US is on track to surpass the April peak for the total number of hospitalised patients.

For a moment, it was possible to believe that fatalities might decouple from cases and hospitalisations, but now it is clear that deaths are starting to rise in Arizona, Texas, Florida and California. For now, the death toll is low relative to the tragic numbers seen earlier in New York.

According to serological studies, about 7% of the US population – a little over 23.2 million people – have been infected to date. However, fewer than 3.5 million cases have been reported. This implies a crude detection rate of 15%. If that rate holds steady and around half of the population is infected over the next year, we might continue to see around 50 000 cases per day for the next 12 months.

Under these conditions, the odds of a second lockdown are rising, with all the consequences that has for the economy and ultimately markets.

Update on scientific news

On the virus itself, the media gave substantial airtime to concerns over the potential for airborne transmission. This culminated in an open letter from 239 scientists asking the WHO to draw attention to growing evidence that COVID-19 can circulate in aerosol particles.

The implications for prevention seem clear: Maintaining a distance of two metres and washing hands often might not suffice; avoiding overcrowded areas and ensuring that indoor spaces are well ventilated is also key.

Immunity to COVID-19 in recovered patients may only last a few months, a study by King’s College London suggested. This leaves patients susceptible to reinfection year after year – similar to the common cold. The findings have implications for the durability of vaccine protection.

Waiting for news on the EU recovery fund

Will the summit this week resolve the discussion over the design of the EU recovery fund? President Charles Michel has published fresh proposals, but it seems that not all parties are yet persuaded. Chancellor Merkel warned her colleagues not to reduce the fund to what she called dwarf size. We expect leaders to reach a consensus, but worry that the package will be diluted significantly.

The UK announced stimulus measures worth close to GBP 30 billion and a GBP 30 billion increase in projected spending on public services. However, the Chancellor also made it clear that at some point, he will have to pivot away from additional stimulus and support and put the public finances on a sustainable basis. The message is clear: The fiscal pendulum may soon start to swing back.

Economic data: Mixed

On industrial production in the eurozone, the extent of the bounce in May reflected largely the scale of the drop in March and April. German production recovered by around 10%, while Italian production recovered by around 40%. UK GDP in May disappointed.  The level of activity is still down by almost 25% from February. The picture should have improved in June and July as the exit from lockdown gathers pace, but there is already evidence that demand may be weak.

Chinese trade data for June was more encouraging. Growth in exports and imports turned positive on the year. Global efforts to control the pandemic had a significant impact: Exports of medical equipment were up by 100% on a year ago. Agricultural imports drove the strong import numbers.

On bank lending, eurozone banks reported that government guarantees were instrumental in keeping loan approval criteria from tightening in the second quarter. However, standards might tighten as guarantee schemes expire. Corporate demand for credit and take-up of pre-agreed lines to finance inventories and working capital exceeded the effects of diminished investment.

Leaving lockdown, but also stimulus?

The authorities in many economies are eager to start easing lockdown, but they need to navigate between creating the conditions for the largest possible rebound and containing further outbreaks. One could argue that the recovery should be demand-driven after the lockdown-driven slump, with consumers tapping into savings they were forced to make as shops, restaurants and bars closed.

So, excess savings and pent-up demand should boost consumption, but in many economies, only state and central bank support has prevented a deeper slump. Concerns about the jobs outlook could cause consumers to hold onto their savings, delaying spending and resulting in disappointing growth.

Accordingly, we expect fiscal support to continue to the degree necessary to allow workers and businesses to survive the collapse in growth. The longer-term growth outlook depends on the ability of governments to work out where the collapse in demand is temporary and where it is permanent.

Higher yields? Equities looking for direction

A marginally improving global economic outlook could drive real yields higher this quarter, while inflation expectations could rise as increasing consumer demand meets supply constraints. The upside pressure on yields could be counteracted by continued central bank purchases of bonds.

Some hesitancy and mixed data left stocks struggling this week. The broad European markets have made little clear headway over the past month, while the US S&P 500 suffered a steep dip late in June, from which it recovered, leaving it somewhat above month-ago levels.

The US tech sector initially regained momentum, driving the NASDAQ Composite to record highs before the market took a break as tech valuations rose to levels dramatically above those of the rest of the US market and even further ahead of those in Europe.  

Chinese stocks gained steadily on growing hopes of economic recovery and with inflation data pointing to a boost to demand. The optimism radiated out to the Asia Pacific region before concerns over the markets overshooting caused indices to level out.  

Earnings season: Look to the future

Nervousness over new virus outbreaks that could threaten the recovery continued to sway investor sentiment. California’s rollback of steps to ease the restrictions clouded the market, leaving it lacklustre ahead of the second-quarter earnings season.

The start of the quarterly reporting was marked by news of large US banks setting aside billions of dollars to cover potential bad loans. More broadly, analyst expectations are low after a poor first quarter and as guidance on the outlook for the next quarter and the rest of the year dried up.

S&P 500 companies are on average expected to post a 42% drop in Q2 earnings[1], with a lot of the slippage in the consumer discretionary sector as shoppers shelved big-ticket purchases.

Markets are expected to look beyond the Q2 reports and listen closely for comments on companies’ prospects.

[1] Data as at 10 July 2020. Source: FactSet, BNP Paribas Asset Management

Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice.

The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.

Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions).

Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

Weekly insights, straight to your inbox

A round-up of this week's key economic and market trends, and insights on what to expect going forward.

Please enter a valid email
Please check the boxes below to subscribe