Macroeconomic Outlook: As the Pandemic Surges, Global Economies Will Be Tested Anew
COVID-19 severely tested the global economy and markets in 2020. Aided by unprecedented monetary and fiscal stimulus, markets responded with surprising resilience. Equity valuations are critically dependent on whether a combination of treatments and vaccines will enable a full reopening of the economy within the next 12 months. This would be reason for concern even under the best of circumstances. Unfortunately, our current circumstances are far from the best.
As we move into 2021, uncertainty persists on many fronts. While the world waits for vaccinations to have a large-scale impact, infections are once again surging and restrictions on movement are scaling up. Meanwhile, the liquidity unleashed to fight the crisis is triggering questions about the inflation outlook. And finally, policy uncertainty persists following tense US elections. As the helpful influence of earlier stimulus recedes, markets will likely face another major test in 2021.
Amid all this, it’s important to recognize that there is potential for some upside risk as well, in the form of effective vaccine rollout, which in turn would lay the groundwork for widespread economic reopening. Such a development would go a long way to reduce the lasting scars from the COVID-19-induced recession.
In this environment, we believe growth and quality assets represent investors’ strongest opportunities – and we think they’re most likely to find those opportunities in the United States and China.
Most asset classes bounced back from the March 2020 market shock to show positive returns in 2020, although increasing COVID-19 case counts and US-election-related uncertainty led to greater volatility and a modest pullback in asset prices in the fourth quarter of the year. Quantitative easing (QE) strongly supported equity markets in 2020, but earnings have yet to come through. Meanwhile, in a marked contrast to past episodes of quantitative easing, this time QE seems to be capping bond yields despite rising expectations for inflation.
In the most recent update to our market outlook, we compared the economic recovery from the COVID-19 shock to a relay race, unfolding in a series of overlapping stages. During the first stage of the race – when economic and market dislocations were most acute – emergency monetary and fiscal stimulus played the most prominent role. Given the circumstances, that stimulus was not particularly targeted, but it was sizable and swift. Because stimulus efforts clearly succeeded in putting a floor under both economies and markets, we see the first stage of the relay recovery as a success.
During the second stage of recovery – the economic reopening – economies themselves picked up the baton. As third-quarter GDP figures in many economies demonstrate, economies around the world delivered impressive results as reopening unleashed pent-up demand. As of this writing, the number of COVID-19 cases is once again growing, and governments are imposing new restrictions.
Ultimately, there cannot be a full recovery without an effective vaccine rollout. Every week brings us closer to that goal – and every week also makes us more urgently dependent on a vaccine coming through. We cannot determine how successfully the overall recovery race has been run until we reach that final resolution.
Furthermore, once the crisis is past – when the pandemic has finally been beaten back and mobility restrictions are fully lifted around the world – yet another transition must occur. At some point, economies will need to transition back to autonomous growth, independent of monetary and fiscal stimulus. How perfect or how imperfect a substitution growth will be for stimulus remains to be seen. The adjustment is certain to be complex, and it is very likely to cause some market convulsions along the way.
Thus, while we at State Street Global Advisors are very comfortable with our expectations for a strong economic rebound in 2021, we are increasingly focusing our sights on everything that comes after that surge. A combination of alertness and agility is most likely to reward investors, as recession gives way to a powerful but temporary rebound followed by an as-yet-undecided new baseline of growth.
United States and China Most Likely to Outperform
The United States and China seem best placed to navigate upcoming challenges while sustaining relatively less long-term damage compared with their global peers. The US and Chinese economies have outperformed during the recent crisis and in the recovery so far.
For 2020, China will be the only large economy to see positive GDP growth (in the neighborhood of 2.5%). Because China experienced the COVID-19 crisis first, it also began recovering sooner than any other country, thereby leading the global business cycle. China’s impressively effective virus control also makes it fairly impervious to the possibility of renewed shutdowns, which will help to ensure that its recovery is uninterrupted. Meanwhile, this year’s US GDP contraction of around 3.7% will be considerably less acute than declines of over 9% in the UK and around 7% in the eurozone.
It is therefore important for investors to consider their exposures to China and to the United States in 2021; we believe these economies will present opportunities that investors cannot afford to miss. Beyond short-term outperformance, both of these economies enjoy favorable potential growth dynamics relative to the rest of the world and therefore should remain relatively attractive investment destinations over time as well.
This is not to say, of course, that investors should approach either market without carefully taking account of potential risk. China’s narrative of success, for example, is extremely compelling. At the same time, high debt levels, geopolitical tensions, and deteriorating demographics pose some challenges. With Chinese stocks making up a substantial proportion of EM benchmarks, and with Chinese bonds now included in credit indexes, this may be the time to consider a dedicated allocation to China, so that relevant risks as well as opportunities can be considered fully.
Elsewhere, the UK looks like a clear underperformer from a macroeconomic perspective, with GDP growth lagging its European peers in 2020. The UK’s handling of the COVID-19 outbreak was also fairly disappointing, as the tradeoff between mobility restrictions and outbreak management was suboptimal compared with, for example, Germany’s experience. Both Germany and the UK are now experiencing a sharp increase in mobility restrictions, but this is occurring against the backdrop of an average 5.9% year-on-year decline in German GDP during the first three quarters of 2020, compared with an 11.0% plunge in the UK. In general, despite relatively cheap valuations, we see greater risk of earnings disappointment in the UK and eurozone and a lower concentration of the high-quality growth companies that we think are most likely to weather upcoming challenges.
The eurozone may present the middle ground between an outperforming US and an underperforming UK. The eurozone certainly faces challenges, as clearly evidenced by mounting COVID-19 cases and renewed mobility restrictions. A fourth-quarter GDP contraction seems more likely than not, given these recent developments. On the other hand, though, a more cohesive and supportive macro policy will prove helpful, not only in supporting the 2021 recovery but also in reducing internal frictions and troublesome institutional limitations to growth (e.g., an insufficiently counter-cyclical fiscal policy).
In emerging markets (EM), the economic outlooks are as varied as they are many. Given their relatively greater dependence on both exports in general and commodities in particular, EM economies would see disproportionate relief from a medical solution to the crisis. Investors will need to weigh that positive propellant against the fundamental strength – i.e., the macroeconomic and institutional strength – of each market in order to identify the best performers.
Quantitative Easing and the Prospect of Inflation
Investors can take some solace in the knowledge that monetary policy will remain supportive globally for a while yet. The Fed’s adoption of an average inflation targeting (AIT) framework is already proving influential, and the thinking behind the change—shared among many other central banks—has already triggered additional monetary easing elsewhere, including Canada, Australia, and the UK. Low interest rates and more QE could be a powerful combination that prevents bond yields from moving up too much even as investors start to more carefully ponder the possibility of higher inflation.
For our part, while we have raised our inflation forecasts for 2020 and 2021, we only did so modestly. It remains very difficult to answer one of the most salient questions related to the COVID-19 crisis: Will it prove to be an inflationary or deflationary shock over the medium term?
Potential Change in US Policy Direction
The election of Democrat Joe Biden as the next US president has sparked fresh speculation about the timing, scale, and characteristics of further fiscal stimulus. While the outgoing administration recently signed off on a $900 billion relief bill, we now wait to see if the Biden administration will seek additional stimulus in the months ahead.
In the global effort to address climate change, the outcome of the recent US presidential election represents a pivotal shift in the political landscape of the world’s largest aggregate carbon emitter. The incoming president’s $2 trillion climate package is focused on infrastructure improvement, job creation, and boosting renewable energy. Although the potential obstacles to this ambitious proposal remain unclear, we believe the tone of the climate-change discussion will change with the new administration, supporting further adoption of ESG practices.
As we have crossed the threshold into 2021, uncertainty continues to prevail, leading to many questions with few clear answers. Rising infection rates raise questions about the extent of restrictions that will be brought to bear in response. Ongoing quantitative easing leads to questions about the inflation outlook. And the challenges of Brexit lead to questions on how the UK economy will weather its separation from the EU.
In this environment, it’s important to recognize the potential for positive developments – especially in the form of a successful vaccine administration – to exert a healing influence. In the meantime, as the world awaits final, medical resolution to the pandemic crisis, we believe that the United States and China will weather the looming test of global resilience best.
For institutional / professional investors use only.
You should obtain and read the SPDR prospectus and relevant Key Investor Information Document (KIID) prior to investing, which may be obtained from ssga.com. These include further details relating to the SPDR funds, including information relating to costs, risks and where the funds are authorized for sale.
The Funds have been registered for distribution in the UK pursuant to the UK’s temporary permissions regime under regulation 62 of the Collective Investment Schemes (Amendment etc.) (EU Exit) Regulations 2019. The Funds are directed at 'professional clients' in the UK (as defined in rules made under the Financial Services and Markets Act 2000) who are deemed both knowledgeable and experienced in matters relating to investments. The products and services to which this communication relates are only available to such persons and persons of any other description should not rely on this communication. Many of the protections provided by the UK regulatory system do not apply to the operation of the Funds, and compensation will not be available under the UK Financial Services Compensation Scheme.
The information provided does not constitute investment advice as such term is defined under the Markets in Financial Instruments Directive (2014/65/EU) or applicable Swiss regulation and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell any investment. It does not take into account any investor’s or potential investor’s particular investment objectives, strategies, tax status, risk appetite or investment horizon. If you require investment advice you should consult your tax and financial or other professional advisor. All material has been obtained from sources believed to be reliable. There is no representation or warranty as to the accuracy of the information and State Street shall have no liability for decisions based on such information.
The views expressed in this material are the views of State Street Global Advisors through December 7, 2020 and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
The trademarks and service marks referenced herein are the property of their respective owners. Third-party data providers make no warranties or representations of any kind relating to the accuracy, completeness or timeliness of the data and have no liability for damages of any kind relating to the use of such data.
Investing involves risk including the risk of loss of principal.
The whole or any part of this work may not be reproduced, copied, or transmitted or any of its contents disclosed to third parties without SSGA’s express written consent.
Equity securities may fluctuate in value in response to the activities of individual companies and general market and economic conditions.
Investing in foreign domiciled securities may involve risk of capital loss from unfavorable fluctuation in currency values, withholding taxes, from differences in generally accepted accounting principles or from economic or political instability in other nations. Investments in emerging or developing markets may be more volatile and less liquid than investing in developed markets and may involve exposure to economic structures that are generally less diverse and mature and to political systems which have less stability than those of more developed countries.
ETFs trade like stocks, are subject to investment risk, fluctuate in market value and may trade at prices above or below the ETFs net asset value. Brokerage commissions and ETF expenses will reduce returns. Changes in exchange rates may have an adverse effect on the value, price or income of an investment. Further there is no guarantee that an ETF will achieve its investment objective. SSGA SPDR ETFS MAY NOT BE AVAILABLE OR SUITABLE FOR YOU. THE VIEWS EXPRESSED/INFORMATION IN THIS SITE DOES NOT CONSTITUTE INVESTMENT ADVICE, FINANCIAL, LEGAL, REGULATORY, ACCOUNTING OR TAX ADVICE. INDEPENDENT ADVICE SHOULD BE SOUGHT IN CASES OF DOUBT. NEITHER THE INFORMATION NOR ANY OPINION CONTAINED ON THIS SITE CONSTITUTES A SOLICITATION OR OFFER TO BUY OR SELL SHARES OF THE FUNDS OR ANY OTHER FINANCIAL INSTRUMENT. Standard & Poor's®, S&P® and SPDR® are registered trademarks of Standard & Poor's Financial Services LLC (S&P); Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC (Dow Jones); and these trademarks have been licensed for use by S&P Dow Jones Indices LLC (SPDJI) and sublicensed for certain purposes by State Street Corporation. State Street Corporation's financial products are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, their respective affiliates and third party licensors and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability in relation thereto, including for any errors, omissions, or interruptions of any index.
SPDR ETFs may be offered and sold only in those jurisdictions where authorised, in compliance with applicable regulations.
Information related to Mexico
This information does not constitute and is not intended to constitute marketing or an offer of securities and accordingly should not be construed as such. The Funds referenced herein have not been, and will not be, registered under the Mexican Securities Market Law (Ley del Mercado de Valores) and may not be publicly offered or sold in the United Mexican States. Disclosure documentation related to any of the aforementioned Funds may not be distributed publicly in Mexico and shares of the Funds may not be traded in Mexico.
European SPDR ETFs
SSGA SPDR ETFs Europe I Plc and SSGA SPDR ETFs Europe II Plc are investment companies with variable capital constituted as umbrella funds with segregated liability between sub-funds under the laws of Ireland and authorized by the Central Bank of Ireland pursuant to the European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations 2011.
You should obtain the Prospectus and Key Investor Information Document (KIID) relating to specific SPDR ETFs and read them carefully prior to investing. For further information and the Prospectus/KIID describing the characteristics, costs and risks of SPDR ETFs, download a Prospectus or KIID here, talk to your financial advisor, or obtain it from your local SSGA office.
US SPDR ETFs
The US domiciled SPDR ETFs named on this site (excluding SPDR Gold Shares & SPDR Gold MiniShares Trust) are only permitted to be marketed into the relevant EEA jurisdiction pursuant to either Article 42 of AIFMD (as implemented under national laws of such member state); or (ii) can otherwise be lawfully offered or sold (including on the basis of an unsolicited request from a professional/Qualified investor). Some of the US domiciled SPDR ETFs mentioned in this site are alternative investment funds for the purpose of the European Union Alternative Investment Fund Managers Directive (Directive 2011/61/EU) (“AIFMD”). SSGA Funds Management, Inc. and State Street Global Advisors Trust Company are the alternative investment fund managers (“AIFMs”) of these Funds.
Before investing, consider the funds' investment objectives, risks, charges and expenses. To obtain a prospectus which contains this and other information, download a prospectus here, or talk to your financial advisor. Read it carefully before investing.