After the mechanical recovery phase generated by the reopening of the economies, which lasted until the end of August, the recovery from current levels of activity looks set to be more laborious. Meanwhile, Covid-19 cases are picking up rapidly in Europe, and the sectors most affected by mobility restrictions and physical distancing cannot go back to normal, hampering the last phase of gross domestic product recovery.
Key risk in Q4: fiscal policy
Against this backdrop, withdrawal of fiscal stimulus remains the top macroeconomic policy risk and it is premature to worry about excessive public debt in developed economies. In the long term, history shows that almost every reflation attempt by governments eventually works, but we are still at the stage where deflation is the overwhelming structural force.
Market leadership holds
With the probability of the economy surprising to the upside rather slim at this stage, we would refrain from calling a shift of leadership to value and cyclical stocks. We would also strongly argue against an idea of a stock market bubble in the U.S. Technology space. Admittedly, some relative charts are rather extended from a historical perspective, but we would rather concentrate on what we believe underpins the last decade’s leadership before we call a structural reversal.
The US presidential election - an external shock
We are, of course, still subjected to potential external shocks, and the outcome of the U.S. presidential election on 3 November is one of them. The scenario of a result so close that it is contested seems the worst. A Democrat wave could accelerate the process of merging monetary and fiscal policies and might lead to a reversal in favour of value stocks and small caps. Anything is possible, although online betting is giving Joe Biden the win at the time of writing.
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From the long-term perspective to short-term explanations of what is going on in the economy and markets – our Group Chief Investment Officer shares his views.