Notwithstanding heightened political tensions, global equities rallied last

Published Date: 31 May 2020

 

Notwithstanding heightened political tensions, global equities rallied last week amid indications that the economic impact of coronavirus has peaked. Most countries over the last few days have eased economic restrictions considerably as fears of a second wave of infections receded. Investor sentiment also received a boost from continued stimulatory measures by policymakers across various economies.

Overall, the MSCI All Country World index added +3.6% 5d on the back of strength across major sub-indices. The MSCI G7 index, the MSCI EM index and the MSCI FM index added +3.6% 5d, +2.8% 5d and +2.6% 5d respectively. Volatility eased across markets but remain elevated. The VIX index, the V2X index and the CBOE EM ETF Volatility index are still +100% ytd, +123% ytd and +73% ytd respectively.

The focus this week will be on politics and central banks. On the political front, the US-China rather public confrontation and the next round of Brexit negotiations will be watched. We also have the European Central Bank and Bank of Canada policy meetings where little change is expected in either interest rate or direction of policy. Beyond that, the US non-farm payrolls data will be of interest to investors. 

Chart of the week

While global equities have recovered sharply from the lows of March 2020, gains have been uneven across markets. Developed market equities have led the rally with the MSCI G7 index trimming their year to date losses to -8.3%. In contrast, the MSCI EM index and the MSCI FM index are still down -16.5% ytd and -19.3% ytd. The outperformance can be put down to the ability of developed economies to spend their way out of the coronavirus pandemic, unlike emerging market economies. In fact, on a P/E ratio basis, the MSCI EM index is now trading at the deepest discount since 2014 to the MSCI World index.

Emerging market equities trading at cheapest level in six years relative to broader markets

Source: Bloomberg

MENA Markets

Most regional markets were closed on account of Eid holidays. The few markets which we did open mid-way through the week reacted positively to easing measures of governments in the region. The sustained rise in oil prices also helped investor sentiment. The Brent oil rallied +7.7% last week to take their 1-month gains to +68%.

As economies approach a shift in dealing with the viral outbreak, it is worth noting that most equity markets in the region are currently trading at a premium to wider emerging markets. The Tadawul and the KSWSE PM index are currently trading at 20.8x and 17.6x 12m forward earnings respectively. The MSCI EM index is trading at 14.2x 12m forward earnings. The DFM index is a notable exception as it is trading at a substantial discount with a 12m forward P/E ratio of 9.1x.

Developed Markets

Developed market equities closed higher as stimulus measures from the Eurozone and Japan overshadowed the tensions between the US and China. The Japanese cabinet approved measures worth USD 1.1tn including financing help for companies, subsidies to help firms pay rent and support for local economies. The latest set of measures coupled with one announced in early April takes the total support so far to nearly 40% of GDP. Meanwhile, the European Union unveiled plans of a EUR 750bn recovery fund which includes EUR 500bn in grants and EUR 250bn in loans to member states. The money will be borrowed on financial markets and repaid from the EU’s budget. However, the plan will need to be ratified by all members in a meeting which is scheduled for the middle of next month.

Overall, the S&P 500 index, the Nikkei index and the Euro Stoxx 600 index added +3.0% w-o-w, +7.3% w-o-w and +3.0% w-o-w respectively.

Emerging Markets

Emerging market equities closed higher but underperformed the broader index. The MSCI EM index added +2.8% 5d compared to a rally of +3.7% in the MSCI World index. The rally was supported by weakness in the USD even as the fallout from US-China spat weighed on investor sentiment.

The fallout of political decisions taken at China’s National People’s Congress had a limited impact on Chinese equities. The Shanghai Composite index added +1.4% 5d. Elsewhere, India’s Nifty index added +6.0% 5d even as GDP growth data came in quite weak at the end of the trading week. The GDP grew at 3.1% in Q4 FY 2020 to lower the full year FY 2020 expansion to 4.2%. This was the lowest annual growth in eight years. It must be noted that only a small part of impact of the lockdown measures would be visible in this data.

 

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