With signs that the coronavirus pandemic has already gone through its peak globally, risk sentiment has improved as equity markets have rebounded from their March lows.
In the US, for example, the S&P 500 reached its low point on 23 March when it was down 30% for the year, but has subsequently recovered (chart below).
“We think that we have likely seen the worst,” Kevin Anderson, head of investments for Asia-Pacific at State Street Global Advisors, told FSA. He expects a gradual economic recovery in the second half and a stronger rebound in 2021.
Because of the expected economic recovery, Anderson has a positive long-term outlook of the global equity markets. However, he remains cautious on the asset class as virus-related risks continue to loom.
“In the last few days, we have seen some signals that the equity recovery in the short-term since the trough in March, has gone arguably too fast.
“There are still risks around how a potential second wave of the virus might look and we think it is time to take a little bit of risk off the table in the short-term in the equity space,” he said.
Echoing Anderson, Esty Dwek, Geneva-based head of macro strategy at Natixis IM, said recently that investors should not be too optimistic about the global equity markets and to keep an eye on earnings.
“The markets have become complacent at the moment. But we do not know how bad the earnings are going to be and investors might be underestimating some of the risks that are ahead,” she said.
Trimming down positions
Anderson, who shared SSGA’s monthly tactical allocation changes across its strategies, explained that the firm has recently trimmed down positions in global equities. More specifically, it has cut allocations in US small-caps and European stocks.
“Short-term, we believe that Europe and US small-cap are more vulnerable.”
On the flipside, he believes that US large-caps are less vulnerable, with the firm maintaining overweight positions in the sub-asset class.
“Large-cap in the US is where we are most constructive, as we’ve seen much less disappointment in earnings from them. Although it is going to be sometime before we really get an assessment of how Covid-19 has impacted earnings, there has really been much fewer earnings downgrades in the US large-cap space than elsewhere,” he said.
He also believes that the US large-cap space has more of a quality factor in them relative to other sub-asset classes.
“We are still obviously in a much more volatile and uncertain environment. Quality factors such as balance sheet strength were one of the leading indicators of equity performance after the global financial crisis in 2008.”
Turning to emerging markets, Anderson said that the firm is “slightly overweight” the asset class, especially in Asia.
“There would seem to be a greater propensity for a swifter recovery in some of the Asian markets, where there has been thus far greater containment of the public health emergency,” he explained.
“There are also some parts of the market that we remain positive on, such as the semiconductor sector in China and North Asia, as well as online e-commerce in China. Those sectors have been doing very well.”
S&P 500 performance