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In these quarterly outlooks, we try to identify market scenarios for investors to consider.
A starting insight is that we are facing a recession, but not a depression. Neither copper nor oil prices—good barometers of global growth—have fallen below their 2015-2016 lows when China slowed down.
We also know that policy makers globally are active with government spending and central bank support. And the uncertainty that we discussed in March receded in mid-April as we predicted.
Thus, investors should be comfortable maintaining their strategic allocations to stocks and bonds. Our base case is that it will feel similar to the recovery following the 2008 global financial crisis—lower interest rates, asset price inflation and weak job recovery.
The recovery from the recession will be slow and uneven. “Work at home” and online activity sectors, such as video gaming and esports, are not even seeing recession conditions, while other sectors like travel are under tremendous pressure. Credit-related sectors like banks are affected because there will be a lot of defaults. There is lots of damage due to unemployment. Data from China supports this. Subway traffic during the workweek is still only 60% vs 2019 and 50% on the weekend.
The fundamental reason to own gold is because real interest rates are negative, a result of the huge central bank stimulus and low interest rates mentioned above. Real rates are now negative in China, too. Also, if the recession will be long, how much more would the Federal Reserve (Fed) stimulate to keep things going? The more it stimulates, the better it usually is for gold.
$1,800 per ounce is a major technical hurdle for gold. As long as gold is below $1,800, I think it is not too late for investors to maximize their gold allocations, which typically is 5-10%. If gold breaks through $2,000, then I would consider taking some gold profits off the table.
I think opportunities exist across the spectrum in fixed income. We expect lots of debt issuance from companies in some of the battered sectors as well as from municipalities. However, the Fed has said it will be buying, either directly or indirectly, so it is hard to see a spike in rates.
In China, interest rates overall have fallen and interest rates for companies have fallen as well. In the U.S., high yield interest rates have spiked and are still at elevated levels. If China is easier than the U.S., this should indicate a global recovery from the recession.
It seems to us that the market expects that a vaccine will be available by the end of this year. If it happens earlier, that would be a positive surprise. A delay, naturally, would be a negative surprise for the markets.
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