Explore Our investment Outlook
Economies contract in pandemic’s wake
After declining 5% in the first quarter, we expect the second-quarter contraction in U.S. economic growth to be significantly worse, reflecting the deep effects of pandemic-driven shutdowns and stay-at-home orders. Elevated corporate debt levels, supply chain disruptions, high unemployment, weak demand and recent social unrest likely will prolong the recession. We believe the economy will begin to improve in the second half of the year, but the recovery process will be slow and extended.
We believe the eurozone’s economic contraction likely bottomed in May, but like the U.S., we expect the recession to be deep and lengthy. In response, the European Union announced a massive recovery plan consisting of loans and grants for pandemic-related relief. The U.K. economy fared relatively better in the first quarter, but policymakers are bracing for a record-breaking downturn in the second quarter.
Gross domestic product (GDP) in China declined nearly 7% in the first quarter, the first contraction since authorities began recording data in 1992. While the politburo insists economic fundamentals remain unchanged, mounting job losses, weak global demand and heightened trade tensions with the U.S. are creating strong economic headwinds. Additionally, rising COVID-19 infection rates in certain emerging markets (EM) countries will create challenges to growth.
Global inflation weakens
Annual headline inflation recently dropped to 0.1%, its lowest level since September 2015, due to falling gasoline prices and coronavirus-related lockdowns. Longer-term, market-based inflation expectations also are well below average. Given the headwinds to growth, we expect these trends to continue in the near term. However, we believe market indicators don’t reflect the effects of massive federal debt, a weaker U.S. dollar and onshoring trends among U.S. businesses, which should push inflation higher in the intermediate term.
Annual inflation in the eurozone recently dropped to 0.1%, a four-year low, on falling energy and food prices. Meanwhile, falling housing and utilities costs drove U.K. inflation to its lowest level in nearly four years. We expect lingering effects from COVID-19’s economic fallout to keep inflation well below central bank targets in developed markets.
Inflation remains low and below central bank targets in most EM countries. Turkey remains a notable exception due to currency devaluation. In China, the COVID-19 crisis recently pushed inflation to a 14-month low. We believe a muted global recovery will keep inflation near or below EM central bank targets.
Stimulus soars
The Federal Reserve’s (Fed’s) series of bold measures have helped stabilize markets. The Fed quickly slashed interest rates to near 0% in early March, and it recently committed to holding rates steady until 2022. The Fed is also maintaining its unprecedented lending and securities-buying programs to aid the recovery. We expect the Fed to maintain a “whatever it takes” approach until the economy is clearly on the mend.
Central banks in Europe and the U.K. expanded their stimulus efforts to combat pandemic-related financial challenges. The European Central Bank increased its bond buying by 600 billion euros in June but left its key lending rate at 0%. The Bank of England cut its key lending rate to a record low 0.1% in response to the coronavirus outbreak. We expect both central banks to use all policy tools available to help restore economic stability.
After cutting its benchmark lending rate twice in early 2020, the People’s Bank of China paused, waiting to see how economic data respond to the reopening of China’s economy. Nevertheless, we believe policymakers may have to launch more aggressive stimulus measures to combat economic challenges in the wake of the coronavirus crisis.
Rates remain lower for longer
Ongoing economic weakness and muted inflation, along with a dovish Fed, likely will keep the 10-year Treasury yield near record lows for an extended period. But, even at their current levels, Treasury yields are notably higher than government bond yields in other developed markets. This factor should continue to drive global demand, contributing to lower yields and higher prices.
Most European government bond yields remain in negative territory, due to economic weakness and central bank stimulus. U.K. rates remain modestly higher and positive, while rates in Japan remain negative amid ongoing central bank stimulus. We expect rates in developed markets to remain unusually low through 2020.
Despite central bank stimulus measures in many EM countries, government bond yields are generally higher than in developed markets. We believe this dynamic provides opportunities in EM countries where rates are higher and more likely to fall or remain stable, including Mexico, Peru and Indonesia.
References to specific securities are for illustrative purposes only, and are not intended as recommendations to purchase or sell securities. Opinions and estimates offered constitute our judgment and, along with other portfolio data, are subject to change without notice.
International investing involves special risk considerations, including economic and political conditions, inflation rates and currency fluctuations.
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Past performance is no guarantee of future results. Investment returns will fluctuate and it is possible to lose money.
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