The Janus Henderson Global Snapshot explores the themes driving markets, the trends to watch, market returns and metrics, and the Multi-Asset Team’s outlook for regions and sectors at quarter end.
Global money surge suggesting strong 2021 economy, rising inflation risks
Temporary job losses
The unemployment rate spiked to 14.7% in April, easing to 11.1% in June as some temporarily idled staff returned to work. The permanent jobless rate – excluding temporary layoffs – rose to 4.5% in June but remains below a post-1985 average of 5.1%.
The economy staged a V-shaped rebound, with GDP and industrial output moving above Q4 2019 levels in Q2. Government investment was a major driver, rising by 16% in the year to June, with net exports also positive and lagging consumption reviving towards quarter-end.
Economic weakness has been comparable with the US/Europe despite much lower COVID incidence. Industrial output fell further in May and the June manufacturing purchasing managers’ survey showed little recovery, although the companion services survey was better.
The purchasing managers’ composite output index slumped to a record low of 13.6 in April but rebounded to 48.5 in June as economies reopened. Germany and France proposed a €500 billion COVID recovery fund but face opposition from the ‘frugals’.
The Bank of England expanded its COVID QE response by £100 billion to £300 billion, close to the Office for Budget Responsibility’s May central projection of a £298 billion public sector borrowing requirement in 2020-21 - since increased to £322 billion.
After a record Q1 capital outflow, EM currencies stabilised in Q2 as the US Federal Reserve’s monetary injections sated global excess demand for US dollars. The JP Morgan EM Currency Index gained 1.7% over the quarter following a 13.1% Q1 loss.
Trends to watch:
Annual broad money growth of 25.7% in May was the fastest since WW2 and suggests a pick-up in inflation in 2021-22, barring an unprecedented velocity collapse and/or dramatic H2 reversal – unlikely given ongoing monetary deficit financing.
Tight credit held back the economy in 2019 but COVID woes were the trigger for a reopening of the taps, reflected in a sharp rise in loan approvals. Money growth has lagged far behind the US but the gap may narrow significantly during H2.
Consumer confidence has remained above 2011-12 levels in the US and Europe but crashed beneath the Global Financial Crisis (GFC) low in Japan despite a better COVID experience. Domestic gloom may cause the recovery to lag despite export exposure to a Chinese rebound.
Temporary job support schemes have prevented a US-style unemployment spike but consumers are the most pessimistic about labour market prospects since the GFC. The gloom is probably overdone and a solid H2 economic recovery may contain a jobless rise.
The Bank of England has mooted a move to negative rates with the economy facing risks from a COVID unemployment surge and Brexit trade disruption. Pass-through of the last cut has been disappointing while more QE would raise questions about the Bank’s independence.
Q2 currency stabilisation encouraged EM central banks to accelerate policy easing via rate cuts and in some cases QE. A GDP-weighted average of short-term rates is through its GFC low and money growth has surged across countries.
Source: Janus Henderson Investors at 15 July 2020. These comments are the views of Simon Ward, Economic Adviser, and should not be construed as investment advice. These views may differ from those of other Janus Henderson fund managers.
KEY MARKET DATA
|Equity market returns for Q2 2020 (%)||Qtr local currency||YTD local currency||Qtr sterling||YTD sterling||Qtr dollar||YTD dollar|
|US S&P 500||20.0||-4.0||20.4||2.9||20.0||-4.0|
|Euro area: Euro Stoxx||16.4||-12.7||19.5||-6.3||19.1||-12.6|
|UK: FTSE All Share||9.8||-18.7||9.8||-18.7||9.4||-24.2|
|MSCI Far East ex Japan (US$)||-||-||15.8||2.5||15.4||-4.4|
|MSCI Emerging Markets (US$)||-||-||17.7||-4.3||17.3||-10.7|
Source: Refinitiv Datastream, Janus Henderson Investors, index price returns, as at 30 June 2020.
Euro area: EU member states using euro currency (currently 19)
Asia: China, Hong Kong, Indonesia, Malaysia, Philippines, Singapore, South Korea, Taiwan, Thailand, Vietnam
BRICs: Brazil, Russia, India, China
World: G10, Eastern Europe & Africa, Asia, Latin America, Middle East.
|Forecast P/E 2020||Forecast P/E 2021||Forecast EPS growth 2020 (%)||Forecast EPS growth 2021 (%)|
Source: Refinitiv Datastream, Janus Henderson Investors, and IBES (institutional Brokers' Estimates System). Estimates for MSCI Indices as at 30 June 2020. Forecast EPS (earnings per share), Forecast P/E (price-to-earnings ratio).
|Consensus GDP growth forecasts (%)||2020||2021||2022|
Source: Bloomberg, economic forecasts, as at 3 July 2020. Forecast GDP = real gross domestic product.
|Consensus inflation growth forecasts (%)||2020||2021||2022|
Source: Bloomberg, economic forecasts, as at 3 July 2020. Forecast CPI = consumer price index.
|Bonds (%)||30 Jun 2020 yield||Qtr return %||YTD return %|
|US 10-year Treasury||0.65||0.03||13.88|
|Japan 10-year government bonds||0.03||-0.08||-0.41|
|Germany 10-year bund||-0.50||0.28||3.14|
|UK 10-year gilts||0.12||1.51||6.46|
|Corporate bonds: (Barclays Global Aggregate Corporate Index $)||-||6.81||1.82|
|High yield: (Merrill Lynch Global High Yield $)||-||11.50||-4.22|
|Emerging market debt (JPM Global Emerging Markets Debt $)||-||11.21||-1.87|
Source: Refinitiv Datastream, Janus Henderson Investors, as at 30 June 2020.
|Currencies and commodities||30 Jun 2020||Qtr change %||YTD change %|
|S&P GSCI Total Return Index $||1650.79||10.47||-36.31|
|Brent oil ($/barrel)||41.25||82.52||-37.79|
|Gold bullion ($/Troy oz)||1783.66||10.64||17.31|
The above data is intended for illustration purposes only and is not indicative of the historical or future performance or the chances of success of any particular strategy. References made to individual securities should not constitute or form part of any offer or solicitation to issue, sell, subscribe or purchase the security.
Please note the below are the views of the UK-based Janus Henderson Multi-Asset Team at quarter end. They do not represent a Janus Henderson house view or the views of individual fund managers and should not be construed as investment advice.
Positive Neutral Negative
|Global corporate||Huge volatility as spreads widened in the liquidity driven sell-off. Spreads have tightened and yields have fallen but could offer long-term upside potential.|
|UK gilts||Historically low yields limit upside but still have a limited role as a hedging asset. Other bond assets have room for spread compression and appear less expensive.|
|Global sovereign||Historically low yields limit upside but still have a role as a hedging asset. US Treasuries are perhaps the most compelling given more room for capital returns.|
|Emerging market debt||Country-specific risks remain a headwind but tempering US dollar strength and spreads that remain at elevated levels may offer some interesting opportunities.|
|High yield||The looming default cycle is a likely headwind but central bank buying is a game changer. Economic backdrop still challenging for these equity hybrids.|
|UK||Oil and dividend cuts have hurt this high yielding international market. Any sterling strength also drives relative returns across FTSE 100 stocks.|
|Europe||A high beta cyclical region with massive fiscal stimulus and attractive valuations, but political and COVID-19 challenges limit conviction.|
|US||Performance has been driven by increasingly narrow sectors, making the headline market level vulnerable as the global COVID-19 outlook continues to challenge investors.|
|Japan||Performance has offered diversification versus other markets and corporate activity is evolving but is highly sensitive to the global macro backdrop.|
|Asia||Asia was first into the crisis and its markets have led the way out. Positive COVID-19 news could benefit this economically-sensitive region.|
|Global emerging markets||Fears about COVID-19 feeding into Latin America are building as China and Asia begin to exit the crisis and markets recover.|
|£/$||Huge US Fed stimulus and high yield asset purchases may have offered a route to US dollar weakness, but Brexit and risks to trade loom over sterling.|
|£/€||Europe and UK are in similar positions on COVID-19 and could potentially benefit from any US dollar weakness. Meanwhile, Brexit trade discussions remain the unknown variable.|
|£/¥||Investors have perceived the yen as offering a potentially 'safe-haven' status given the positive correlations shown by many asset classes.|
|Property||Lower bonds yields made property look attractive but not relative to history, while areas such as retail have looked unappealing.|
|Gold||This traditional hedging asset has been in demand amid elevated volatility and particularly as COVID-19 fades and stimulus drives inflation over the medium term.|
|Oil||OPEC production cuts amid the oil war at the start of 2020 have been positive but may not be enough. Pause in economic activity continues to weigh on demand.|
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