With the world’s economy and markets recovering from the coronavirus-induced shutdown, there is much uncertainty in the outlook for economies and stock markets. Martyn Hole and Peter Becker share their perspectives on the prospects for economies, markets and companies.
What kind of economic recovery do you expect?
Martyn: At Capital Group, since the beginning of the crisis in January we have focused on three factors that we believe will impact the shape of the recovery: the monetary response, the fiscal response and what we expect to happen with the coronavirus.
The below chart shares three potential hypotheses of a shape of recovery and the probabilities that we give them. The best case would be a V-shaped recovery, which would happen because of a strong policy response and a positive medical outcome. The worst case is a W-shape recovery, which would be a poor viral scenario and a bad policy response.
Though the shape and pace remain uncertain, a solid recovery is possible
For illustrative purposes only.
[1]. As at 31 May 2020. Data for the three recovery scenarios are based on estimates from Capital Group economist Jared Franz. GDP: gross domestic product. Sources: Capital Group, Bureau of Economic Analysis, Refinitiv Datastream
We are currently in the U-shape scenario. To reiterate a comment made by Rob Lovelace, vice chairman of Capital Group and an equity portfolio manager: “This is different than the 2008 financial crisis — we can see the other side of the valley, what recovery can look like when policies are relaxed, and that to me is reassuring.”
I would emphasise that the current crisis is very different from the situation we had in the global financial crisis where people had serious existential fears about the stability of the global financial system. This is not something we are facing in the current crisis. So far, the fiscal and monetary response has been very powerful across both the US and Europe and it has happened at a much faster and stronger rate compared to during the global financial crisis.
So far, the viral outcome has perhaps been better than the pessimists have been arguing, but we still don’t have a vaccine or any treatments that are particularly effective.
Has the crisis brought about opportunities for equity investors?
Martyn: Many of the powerful secular trends that were in place within equities pre-COVID 19 have been accelerated by this crisis. For example, the continued growth in the share of retail sales in the US coming from e-commerce. As at the end of March, e-commerce as a percentage of total US retail sales was around 12% and the scope for this to grow further is huge.
Another trend is the increasing number of subscriptions to on-demand video streaming services. For example, Netflix announced in April that it had added a net 15.77 million paid streaming customers in the first quarter of 2020 – a number that was accelerated due to the lockdown situation in many countries. We expect this trend of increased subscriptions to continue, albeit at lower levels than we have seen in the past few months. The runway for growth in this area is compelling, given streaming video on demand is still only mid-single digits of total TV consumption in the US.
How do you view the outlook for US and European equities?
Martyn: Within the US, although many may consider equities to be expensive (prospective earnings are at the top end of the range that we’ve seen over the past 20 years), it is possible to find companies that look attractive in terms of valuations or have great growth prospects. We believe an active approach is important to uncover opportunities in this market.
Generally, European companies have done a lot worse than those the US in terms of their corporate earnings and dividend payouts. While dividend payments are down around 6% in the US, in Europe they’ve fallen more significantly. The good news is that we are starting to see very early signs of a pick-up in earnings expectations. Again, a selective approach to the region can help uncover interesting opportunities to invest, particularly in areas such as healthcare and information technology.
How do you see the fixed income landscape going forward?
Peter: The swift responses we have seen from governments and central banks to the coronavirus have prevented a deeper economic decline than the one we are currently facing. However, we are just at the beginning of seeing the economic impact of some of the lockdowns. The recovery will likely be slow: the ECB estimates it will take three years to return to 2019 GDP levels.
Slow growth and low inflation suggest the low interest rate environment that has prevailed since the global financial crisis is here to stay for longer. In terms of fixed income, rates are low and will stay low for longer. The increase in government bond supply has probably been priced in and we have large central bank packages to absorb that. This means that fixed income investors who need yield or income will have to continue to look elsewhere. This is particularly true if companies are cutting dividends. ‘Elsewhere’ means corporate credit and emerging market debt. We believe it is important to take an active approach with deep fundamental research, and that is particularly important within these asset classes in the current economic climate. This is because we believe there will be companies that will struggle to survive, and default rates will rise. In addition, there will be emerging market countries that are in better shape than others to weather the crisis.
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About the speakers
Martyn Hole is an equity investment director at Capital Group. He has 38 years of investment industry experience and has been with Capital Group for 17 years. Prior to joining Capital, he worked at J.P. Morgan Asset Management. He holds a master’s degree in natural and engineering science with honours from the University of Cambridge. He also holds the Chartered Financial Analyst® designation.
Peter Becker is an investment director at Capital Group. He has 23 years of industry experience and has been with Capital Group for one year. Prior to joining Capital, Peter was a managing director in the fixed income product management team at Wellington Management. Before that, he was a portfolio manager at Aberdeen Asset Management. He holds a master's degree from The Ingolstadt School of Management. He also holds the Chartered Financial Analyst® designation.