Pompeo Pontone

The IMF has recently published its World Economic Outlook, based on the data available at the time of April 2020. The decline in global activity due to the COVID-19 pandemic has been unprecedented and, despite the recent equity markets performance, the data suggest deeper downturns than previously forecasted. The spread of the pandemic has been somehow characterised by different dynamics which affected many countries in different ways, worsening in some areas and levelling off in others. Few countries (Chile, China, India, Malaysia, Thailand, Australia, Germany and Japan) have performed better than expected but, overall, we have witnessed a dramatic drop in consumption and service output and private investments. Such combined demand and supply shock were similar to war-time events, together with the collapse of the mobility among people. The global decline in work hours (2020:Q1 vs 2019:Q4) amounts to a loss of 130 million full time jobs, with a forecast of 300 million full time jobs loss in 2020:Q2. Global Trade contracted by around 3.5% (yoy) in 2020:Q1 and average inflation dropped by around 1.3% across the globe. After the collapse of oil prices and the disruptions caused by the Contango, petroleum prices have recovered and they are stabilizing, where the oil futures curves indicate expectation around $38 in 2021. In the baseline scenario, global growth is projected at -4.9% in 2020 (-8% for the advanced economies and -3% for the developing world) and at 5.4% in 2021 (4.8% for the advanced economies and 5.9% for the developing world) thanks to a gradual recovery of consumption and investment. World Trade Volume is expected to contract by 11.9% in 2020 and to increase by 8% in 2021. One particular point that I would like to focus on is the huge increase in government debt and deficits due to the COVID-19 induced output contraction and revenues fall. Global public debt is forecasted around 101% of GDP in 2020-21 (130% for the advanced economies and 63% for the developing world) and the average overall fiscal deficit around 14% of GDP in 2020 (16.5% for the advanced economies and 10.5% for the developing world). Although the macroeconomic data and forecasts are pretty grim, in my opinion the market will not revisit the lows and might well test new highs. We can expect PMIs, production, retail sales and corporate data to improve in the medium term, while the market volatility should stabilise and the equity and credit markets will continue to benefit from massive fiscal policy measures and from Central Banks extraordinary easy monetary policy. In addition, we will probably see additional large fiscal stimulus packages from the US government. The credit spreads will remain “artificially” compressed – especially in the low investment grade spectrum – mainly due to the Fed asset purchase program. On a perspective relative value performance, I expect the China equity market to outperform the US market which should in turn outperform the European market. I remain bearish on the sterling while I do not believe the USD to further weaken vs the Euro.  Despite the recent very strong performance, I expect the gold price to continue its path towards $2,000 per ounce. Overall, I believe that the recent policy measures have fundamentally distorted the price discovery dynamics in the markets making it extremely difficult for investors to find optimal asset allocation while minimizing the risk.

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