The official blog of BNP Paribas Asset Management

Weekly investment update – Diverging fortunes

The latest purchasing manager indices (PMIs) illustrate the divergence that is appearing in the economic fortunes of Europe and the US.

The composite PMI for the US rose to 55.5 in October, indicating that the recovery has gained momentum amid a sustained upturn in demand. By contrast, it fell to 49.4 in the eurozone, signalling a renewed economic downturn (the threshold separating growth and contraction is 50).

Exhibit 1:

Restrictions – Tighter in Europe, more laissez-faire in the US

The primary driver of this divergence in the numbers for both the manufacturing and services sectors is the difference in responses by governments to rising COVID-19 infection rates — more restrictions in Europe, far fewer in the US. The number of confirmed new cases is now several times higher in most countries than it was during the initial wave in March and April (five times higher in France). Fortunately, the number of deaths is far lower (one fourth in France).

In fact, The Economist believes that the higher number of cases primarily reflects more testing[1] and the actual number of new cases is fewer (again, about one fourth in France). Be that as it may, politicians and health officials are having to react and are re-imposing restrictions, moving closer and closer towards full lockdowns. While most hope to avoid the most economically damaging restrictions, stock markets are already reflecting worries that activity will not rebound in the fourth quarter as hoped.

Markets look beyond surprisingly good earnings…

It is perhaps because of these concerns that investors have reacted less positively to what has been a surprisingly good season for company earnings reports, at least so far. The headline earnings figures have inevitably been poor (down by 10% year-on-year in the US), but what matters more for markets are the earnings surprises and changes in guidance.

Earnings have beaten analyst expectations by 16% in the US and by an even higher 23% in Europe, and this across most sectors. When companies have provided guidance on future earnings, two-thirds have raised it. Analyst earnings revisions similarly reflect rising spirits, with three times as many upward as downward earnings revisions in the US. In Europe, it is just 1.4 times. Whether this optimism can withstand the deteriorating pandemic headlines is one of the key questions facing the markets over the next few months.

…and anticipate a Biden victory

The other crucial factor for the outlook will be the outcome of the US elections. Will the fiscal stimulus, changes in tax policy and legislative changes that would follow a ‘blue sweep’ (a Joe Biden victory and a meaningful Democratic majority in the Senate) materialise or will gridlock continue?

The amount of legislation that has been passed in the current Congress is 60% lower than it was during the first two years of Trump’s term when Republicans controlled both the Senate and the House. Even with a Biden victory, if the Democrats do not secure a working majority in both chambers, the prospect of significant policy changes is perhaps lower than the markets currently expect.

What equity markets anticipate can perhaps be divined from the relative performance of several sectors in the week after the first presidential debate, when polls and betting markets showed rising expectations of a blue sweep.

Exhibit 2:

Expectations of a Biden victory then triggered moves reflecting likely greener policies to the benefit of renewables and the detriment of ‘dirty’ coal, improved access to healthcare, curbs on drugs prices and restrictions on tech giants.


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. The views expressed in this podcast do not in any way 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.

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