May 2020 / INVESTMENT INSIGHTS
Global Equity Outlook: Looking Beyond the Immediate Disruption
Although volatility and crises may cause near-term panic, it is important to look beyond the immediate disruption
- While economic growth conditions were favourable for global equity investors going into 2020, there has been a marked deterioration amid the spread of the coronavirus and sharp oil price declines.
- The implementation of lock-down measures to varying degrees globally has led to a drastic decline in economic activity—as a result, we believe the global economy will enter a recession in the next one to two quarters.
- Although volatility and crises may cause near-term panic, it is important to look beyond the immediate disruption we are experiencing and keep a long-term perspective.
We entered the year with global growth troughing and expectations of modest growth throughout 2020. Specifically, the deceleration from the 2018 U.S. tax cuts and the U.S.-China trade war were creating a favourable environment for equities, backed by low rates and high multiples as markets anticipated earnings acceleration throughout the year.
Coronavirus Impact Amplified by Sharp Oil Price Declines
The coronavirus began to affect the markets in late December, and spread rapidly during January and February from its epicenter in Wuhan in the Hubei province of China, morphing into what the World Health Organization labeled a global pandemic. The uncertainty this created was amplified by sharp declines in oil prices triggered by a breakdown in talks between the Organization of the Petroleum Exporting Countries (OPEC) and Russia. This prompted Saudi Arabia to slash its official selling prices to significantly below-market levels and announce plans to ramp up its oil output, which brought further uncertainty to markets.
Recessionary Conditions Ahead
The implementation of lock-down measures to varying degrees globally has led to a drastic decline in economic activity—as a result, we believe the global economy will enter a recession in the next one to two quarters. However, governments and policymakers have been responding in tangible ways to help the economy, and we expect testing and treatment for the coronavirus to improve and accelerate. We anticipate that U.S. infection rates will peak in the next couple of months.
Investing for the Long Term
Against this uncertain backdrop, we want to own the companies that will come out the other side of the crisis in a stronger position. Although volatility and crises may cause near-term panic, it is important to look beyond the immediate disruption we are experiencing and keep a long-term perspective. While being respectful of risk control, both our experience and investment framework tell us that if we focus on great assets that we believe are on the right side of change, we have the potential to reap rewards for our clients over the long term.
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