Economic activity rebounds
The world is on a much better footing than a quarter ago as economic activity has substantially rebounded. The recovery began earlier than many investors expected, supported by unprecedented amounts of monetary and fiscal stimulus. We now forecast a contraction in global GDP of 4.0% in 2020, which represents a 0.6 percentage point improvement versus last quarter.
Sovereign-bond yields remain historically low
In the past quarter, yields remained at low levels and fluctuated in a narrow range. Real, or after-inflation, yields are currently negative and we don’t think this situation is sustainable. However, we don’t think yields will rise by a significant amount in the foreseeable future due to a number of secular forces that are unlikely to reverse in the near term.
Boosting equity allocation by one percentage point
Monetary policy is expected to remain highly accommodative in order to support the economy and financial markets. Over the longer term, stocks offer superior return potential versus bonds, a view supported by the still significant equity-risk premium that exists in today’s low-interest-rate environment.
Executive summary
Equity markets have staged a remarkable recovery as central banks provided critical backstops, economies gradually emerged from shutdown and investor confidence was restored. The economy rebounded quickly after mass quarantines, but progress has slowed as the easiest gains have already occurred.
Economy
The world is on a much better footing than a quarter ago as economic activity has substantially rebounded, the threat of COVID-19 has moderated and promise of a vaccine has grown.
Fixed income
A gradual increase in sovereign-bond yields would generate low single-digit to slightly negative total returns, potentially for many years.
Equity markets
The equity market rally that began in March extended into the summer, with most major indexes posting double-digit gains in the past three months.
Asset class commentary
The world is in a very different place than it was a quarter ago. Economic activity has substantially rebounded, the coronavirus is no longer accelerating and progress continues toward a vaccine. Looking forward, challenges include increased virus transmission, fiscal drag, lagged credit losses, the U.S. election, the end-of-2020 Brexit deadline, ongoing protectionism, and the possibility of an eventual increase in inflation.
Regional preferences
Market views
Direction of rates
Emerging markets outlook
Over the past 20 years, emerging-markets equities have gone from being dominated by Latin America and commodity producers to being driven by North Asia and technology. China now makes up over 40% of the MSCI Emerging Markets Index and China, Taiwan and South Korea together account for two-thirds of the benchmark.
The British pound is expected to underperform the euro and the yen, both of which are predicted to continue outperforming their emerging-market peers.
Emerging-market currencies have been affected by the onset of pandemic and have underperformed other risky asset classes since the lows of late March.
The Canadian currency outlook is now bullish compared to the U.S. dollar given some new positive factors. It is likely that the broader U.S.-dollar trends will set the tone for the Canadian currency.