Brent crude oil is now priced below USD 40/barrel for the first time since mid-June. A stall in the recovery of demand in Asia, the end of the summer driving season in the US, increased supply from OPEC+, falling stock markets and worsening US-China relations are all weighing on global oil prices.
New Investment Outlook: Back to the future
Yesterday we published our latest quarterly research report, Investment Outlook. The focus of this issue is on how today's high stock market valuations can be justified, why we overweight equities in our own portfolios and why digitisation and "green" investments will remain important market drivers well beyond the COVID-19 pandemic. A theme article explains how green hydrogen (made using renewable sources) can contribute to the important global transition to emission-free energy. Another theme article analyses the new consumption patterns of ageing populations. To read the report as well as a 2-page summary or watch an 8-minute video on our experts' current market view, visit here.
American labour market keeps recovering
The American labour market has continued to provide upside surprises. After peaking at nearly 15% in April, US unemployment fell to 10.2% in July and declined further to 8.4% in August. Worth noting is that these figures are still above pre-crisis jobless levels. Looking ahead, we foresee a slower labour market recovery than in recent months.
Trump focuses increasingly on China in election campaign
President Donald Trump praised the American economic recovery and progress towards a COVID-19 vaccine this week. Otherwise he focused on new proposals to reward tax credits to companies that bring jobs from China back to America. We do not expect any major shift in US policy towards China regardless of who wins the November election, but relations will probably be characterised by reduced drama if Joe Biden beats Trump. The Democratic presidential candidate wants to replace today's bilateral policy with a common stance on China with allies in Europe and the rest of Asia.
The US Senate is back in session, and next week the House of Representatives will return from its summer break. This will provide opportunities to negotiate a new stimulus package, but the parties are still far apart. The Democrats demand at least USD 2.2 trillion in new measures, while the Republicans are preparing a "skinny relief bill" of only USD 500 billion. As the election approaches, it will be harder and harder to agree on a new package. So it is encouraging that the two sides seem to have agreed on a temporary extension of current government funding (which would otherwise expire September 30).
Our market view
The world economy is recovering, after bottoming out in the second quarter of 2020. The recovery is being driven by the reopening of advanced economies, but also by the aggressive crisis responses of governments and central banks. Today's questions about future growth very much centre on whether new virus outbreaks will force public authorities to impose major new lockdowns, whether governments can deliver stimulus packages to jump-start growth and whether household consumption − as well as business production and investments − will bounce back.
We naturally see risks in all these areas, yet we expect new outbreaks to be met with "smart" lockdowns and believe that the necessary stimulus measures will materialise. The recovery will thus continue, although because of repercussions from the lockdowns it will take time before we return to pre-pandemic economic growth trends. But we also believe that interest rates and bond yields, which are highly important to the stock market, will remain even lower than we previously expected.
This provides a sound basis for share price increases, although the surge in stock market indices over the past several months means that our bright outlook is already largely priced in. With valuations that have historically only been surpassed during the IT (dotcom) bubble of 20 years ago, the question is: can the rally continue? There are good arguments for accepting higher valuations − especially low interest rates and yields, as well as major stimulus packages − which suggest continued healthy growth and supply liquidity to financial markets, driving up asset prices. Looking ahead, we expect a more normal stock market pattern after the vigorous recovery, but we are sticking to our recommendation of an overweight in equities and other risk assets such as corporate bonds in the high yield segment.