Upswing with swing
Although there is a discussion in stock markets about the strength and sustainability of the impending economic recovery, markets continue to rise to fresh highs. Patrik Lang, Head of Global Equity Research & Equity Strategy, shares his view on the markets.
Key takeaways:
- Markets are rising to new highs, but investors remain sceptical because they worry about the risk of a second wave.
- A second wave would not lead to renewed nationwide lockdowns and therefore would not jeopardise the ongoing recovery.
Stock market: a clear signal
Global equities have now gained over 40% since the end of March and there seems to be no end in sight to the rally. At the same time, the Covid-19 crisis rages on, with the number of new infections reaching new highs last week. How can this apparent discrepancy be explained? In the first place, the stock market clearly does not believe in further nationwide lockdowns and with good reason. Broad-based closures were unavoidable in March because the pandemic hit almost all countries unprepared.
“One important reason for the rapid recovery is the unprecedented broad-based policy response,” Patrik Lang, Head of Global Equity Research & Equity Strategy
Meanwhile, the world has learned that targeted local lockdowns in combination with extensive testing and tracing are more effective and less costly than general lockdowns. In addition, important measures such as wearing face masks help to contain the situation. All in all, this should be sufficient to avoid further lockdowns that could jeopardise the ongoing recovery.
Strong recovery ahead
The question remains what the upswing will look like. China is likely to be a telling example. The country was the first to be hit by the pandemic and the first to start reopening. Interestingly, the economic recovery in China has been very strong and exceptionally fast. For example, industrial production returned to pre-crisis levels as early as April. Initial indications also point to a strong recovery in Europe. In the US, the pandemic started late, particularly in the southern states, but it is also likely to develop in Florida and California the way it did in China.
The question remains what the upswing will look like.
One important reason for the rapid recovery is the unprecedented broad-based policy response. After very tough negotiations, the EU has agreed on a rescue package after long negotiations. This should help to cushion any negative second-round effects of the pandemic, such as company bankruptcies. Moreover, an agreement should also support the euro.
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Markets Explained
What is going on in the markets? Julius Baer’s experts share their views.