Market Insight - Global Monthly Outlook - June 2020 (covering May 2020)

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Global Outlook

Stocks have recovered globally to levels last seen in early March on fresh stimulus measures and hopes that economies are on the mend as lockdowns ease. The reopening of economies has been a common theme across the markets in recent weeks, as they largely shrugged off concerns over renewed tensions between the US and China after the US said that it no longer considers Hong Kong autonomous from China. The recovery in equity prices experienced in recent weeks can in large part be attributed to the expected impact of a dramatic easing of fiscal and monetary policies in all the major economies. 

United States

• US equity markets advanced higher during May, encouraged by signs of states and businesses around the country reopening. Market leadership shifted to sectors that have been laggards in recent times, for example value stocks like financials, which typically trade at low multiples of their book values.
• US equities have recouped most of loss and staged a sharp rally since bottomed in mid-March. The risk appetite was lifted by contained confirmed case in most states, and better-than-expected employment data, we are moderately favor US equities.

Europe (including UK)

• European and UK equities continue to rally as countries began easing lockdown measures. Markets were also buoyed by further central bank easing and positive developments at the European level with regards to how the economic recovery would be funded. Utilities, Industrials, IT and Consumer Discretionary were best performing areas.
• Despite improving outlook and Spain as well as Italy pandemic contained, we remained cautious in Euro Zone due to its cyclical bias as we see better opportunities in other regions.

Asia Pacific (ex Hong Kong ex China ex Japan)

• Asian equities declined in May. US-China tensions have re-escalated and dominated market headlines, overshadowing accommodative policies and positive developments on the containment of COVID-19. Healthcare staged strong returns and was the best performing sector over the month.
• North Asia is our preferred market within the region. China, Korea, Hong Kong and Taiwan are all in a way “first-in-first-out” from the impact of COVID-19 and their governments are committed to providing strong monetary and fiscal supports. 

Hong Kong and Mainland China (H-shares)

• Chinese and Hong Kong equities declined in May. Its was led by a fresh sell-off in late May triggered by renewed US-China tensions that have expanded into technology, financials and geopolitics. 
• We believe China continues to provide abundant attractive investment opportunities from a long-term view. We believe many themes we have been favouring, such as digitalization and premiumization, will not be derailed by the COVID-19. In Hong Kong however, we are concerned about renewed social tensions and we believe it may weigh on local businesses and delay its economic recovery from COVID-19.

Japan

• Japan’s equity market ended the month higher as investor sentiment was supported by expectations for a resumption of economic activity in Japan and overseas. These expectations were fuelled in part by the decision of the Japanese authorities to lift the state of emergency.
• Japanese corporates have been continuing to buy Japanese equity. Corporate governance reform continues to progress slowly but surely leading improvements in capital efficiency and profitability in Japan.

Fixed Income

• May is a strong month for high yield bonds. Two factors contributed to the ongoing rally: strong central bank support, and a continued slowing of Covid-19, which has led many countries to start exiting lockdown.
• As economies slow, large fiscal policy stimulus programmes have also been a part of the response of many governments. Structurally, we are of the view that secular stagnation will persist and hence result in a macro economic backdrop which continues to see low growth, low inflation and prolonged low rates. We expect to see relative support of fixed income, especially high-quality assets like government bonds and Investment grade credit.

Emerging Markets

• The overall emerging equity markets gained amid the reopening of virus-hit economies around the world despite the rate of infections in Brazil, Russia and India continuing to rise. Supported by stimulus efforts from governments and central banks, as well as optimism that a coronavirus vaccine will eventually be developed, the asset class generated positive, albeit modest, returns in May.
• Commodity prices bounced back somewhat, led by energy prices, with metals such as gold and silver also recording price gains. Commodity sensitive currencies strengthened in value against the US dollar with the Mexican peso and Russian rouble appreciating the most.