Our macro regime framework continues to indicate the global economy is likely moving into a recovery regime, confirming our expectation of an inflection in the business cycle. By and large, recent global economic data releases have shown signs of stabilization as most economies have begun the reopening process. Over the past two months, indicators from consumer confidence to retail sales, business surveys and industrial orders suggest modest improvements off the bottom readings registered in April when the most stringent lockdown measures were in effect. The improvement in economic data is most apparent in Asia, particularly in China, where evidence of an economic recovery is emerging across several parts of the economy, such as housing, industrial orders and production, money and credit growth. Emerging markets outside of Asia are still lagging, reflecting the most recent contagion waves in Latin America and Russia (Figure 1).
While the developed world is still contracting, the rate of deterioration is slowly improving, particularly in Europe where economic data may soon confirm the transition to a recovery phase likely ahead of the United States. Furthermore, sentiment in global capital markets continue to improve with additional broad-based outperformance in risky assets, indicative of improving global growth expectations despite recent concerns of rising COVID-19 cases in several parts of the United States (Figure 2). Overall, a combination of below-trend growth (as indicated by our leading economic indicators) and improving growth expectations leads us to believe all regions are in a recovery (as Asia today) or may move into a recovery phase soon (i.e. the developed world).
Figure 1: Leading economic indicators suggesting Emerging Asia is already in recovery. Improving growth expectations, implied by rising risk appetite, suggest the rest of the world is entering a recovery regime soon.
Figure 2: Market sentiment signaling improving growth expectations and the potential for a bottom in the global economic contraction
- We maintain a higher risk posture than our benchmark1, sourced through an overweight exposure to credit, emerging market equities and cyclical equity factors. In particular:
We maintain a neutral total equity exposure tilted towards cyclical markets and sectors with an overweight to emerging market equities, and cyclical factors such as size and value. In addition, we have increased our exposure to developed markets outside the US, at the expense of US equities, given favorable currency valuations and relative growth momentum.
- In fixed income, we maintain an overweight exposure to US high yield credit, emerging markets sovereign dollar debt, and event-linked bonds at the expense of government bonds, particularly in developed markets outside the US. Our total duration stance is neutral.
- In currency markets, we maintain an overweight exposure to foreign currencies, positioning for US dollar depreciation. We remain underweight perceived safe havens2 such as the Japanese yen and the Swiss franc in favor of cheaply valued, growth sensitive currencies like the Euro, Canadian dollar and Scandinavian currencies.