The most severe price slumps caused by the corona pandemic seem to be over and the stock markets – especially in Europe – are recovering noticeably. The focus is now on whether the market valuations are appropriate to the actual economy. Gilles Moëc, AXA Chief Group Economist, Head of AXA IM Research and Chriss Iggo, Chief Investment Officer, Core Investments at AXA IM, analyze the current situation on both sides of the Atlantic. Her conclusion: Europe and America have opposite signs.
Corona seems to be under control in Europe
Compared to the United States, where the spread of the corona virus is accelerating significantly, the pandemic in Europe currently appears to be relatively under control – with a noticeable impact on the stock market. The latter had experienced a rare moment of outperformance in the recent past. However, the current time remains difficult to predict and the European market is subject to specific risks. “Even if the spread of viruses is not to be equated with American developments in any part of Europe, it appears that measures to contain them are being taken much more quickly. This is shown by the latest trends in Barcelona, ”says Moëc. “Disruptions in the supply chain would be the result.” Another risk would be with employment relationships. “The labor market is currently being artificially stabilized by very large subsidies. However, layoffs are threatened if these government support programs are cut back, ”says Moëc. This could depress consumer spending after the current, unexpectedly strong recovery. There is also a risk for the European market in the tightening of lending criteria by banks, which want to use this to prevent the possible lack of government guarantees.
“A European rescue package is needed to counter the looming risks,” says Moëc. “And despite the recent agreement of the European member countries on the EU reconstruction fund, which sends a clear political signal, the monetary stimulus is manageable. The current program only corresponds to an economic growth of three to four percent over a period of seven years. ”In particular, the less willingness to act would be a clear difference to the United States.
America is preparing for more
The United States Treasury Secretary, Steven Mnuchin, is publicly discussing the waiver of smaller loans granted under the Paycheck Protection Program – and is thus contrary to Europe. At the same time, the House of Representatives voted positively on an economic program that would correspond to eight percent of gross domestic product in 2020 and a further seven percent in the following year. President Donald Trump seems increasingly positive about this program in view of the declining survey results. “Since the beginning of the crisis, the markets have alternately focused either on the risks of the pandemic or on supportive political activities,” says Iggo. “The former is more positive for Europe, the latter for the United States.”
In the end there is the conviction that the world will recover
However, the main driver of the markets is the fundamental belief that the world will recover – both economically and in relation to the corona pandemic. This psychological component is equally the reason why market valuations and current momentum contrast with the risks of the pandemic. The return expectations of equity investors should not lead to arrogance. The economy has plummeted, unemployment has risen, the US presidential election will lead to political uncertainty, and the spread of the virus could increase again in the early winter. It is not yet clear what impact the pandemic will have on globalization, but none of this is new knowledge. In the coming months, the European deal, fiscal stimulus in the run-up to the US presidential election, a breakthrough in vaccine research, and a possible decline in infection rates could stabilize the markets as positive factors. “Year-to-date, most stock index returns are still negative, and developments in the first quarter have outperformed their stock counterparts. However, unless there is a significant deterioration in economic or pandemic development, it is unlikely to remain that way, ”says Iggo. “Equity investments offer investors the opportunity to participate directly in upswing and the current outlook is positive. Now it is important that the companies confirm the analysts’ expectations. ”The market development under the current information situation suggests that very bad news is needed for the bears to gain the upper hand again – for example a comprehensive second wave or another one Lockdown of large parts of the global economy. “It is very unlikely that economic output will fall back to the level at the beginning of April 2020, but concerns about it can also lead to significant market movements,” says Moëc. “Fortunately, it doesn’t look like it at the moment.”
Disclaimer: The text is a column by AXA Investment Managers. The content of the column is not the responsibility of 4investors and therefore does not necessarily have to agree with the opinion of the 4investors editorial team. Any liability and claims are therefore expressly excluded by 4investors!
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