The restrictions on people’s movements, the so-called ‘lockdowns’, now affect more than half of the world’s population. The economic disruption from these measures will be enormous, with the flow of people and goods severely curtailed, and a global recession is all but inevitable. However, countries that have been able to resume activity earlier than others should fare relatively better.
This situation explains the changes made by our investment teams to their five-factor frameworks. Both Developed Markets and Emerging Markets teams saw a downgrade to their outlook. However, the largest deterioration was, by far, in developed markets, for which the overall outlook is now negative.
So, does this mean that emerging markets as a region will outperform developed markets for the foreseeable future? That is what the relative stance of our investment teams implies. Yet, as we move into a global recession, the traditional outcome for equity markets is an underperformance of equities versus other assets classes and, within equities, an outperformance of the US stock market relative to other regions.
We therefore need to be more nuanced, and not simply look at EM as an homogeneous group versus DM. One point that our Emerging Markets team has made in this outlook is that country allocation will be an important discriminating parameter. Favoring North Asia to the US doesn’t mean that all emerging markets will recover either quickly or soon. ‘Stay selective’ will be the name of the game, also from an individual stock viewpoint.
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