- It has been a year since the 2020 global economic shutdown and the most severe dislocation ever in the world economy – global equities dipped 32% before bottoming in late March 2020. As we look at the world now, there is a remarkable set of events unfolding. Effective vaccines for COVID-19 have been developed and are being distributed globally, though unequally. Global equity markets have rebounded. US equity markets have risen 30% from the end of 2019, the pre COVID-19 period while Chinese markets have risen 29%. However, looking at other markets, there is a divergence between the US and China and the “rest of the world”. Gains elsewhere have been half as much overall and some regional markets show net losses.
How long could US COVID-19 exceptionalism last?
- Citi analysts believe the explanation for the US rebound is the expectation of a policy-driven economic boom and a rapid, vaccine enabled recovery from COVID-19. Unlike the more cautious posture during 2018-2019, Citi analysts now have a more positive assessment of US economic risk and see the probability of a coming US recession as very low.
- US equity markets are enjoying another positive “jolt” to growth expectations from the Biden administration’s fiscal expansion plans. Regardless, Citi analysts do not expect another 30% equity market drop or another 80% run up to repeat what followed last March’s swoon.
- Furthermore, Citi analysts also expect interest rates to go higher, perhaps as high as 2.5% for the 10-year US Treasury yield once the entire world economy is post COVID-19.
The bigger impact could be from the US to the World
- Investors should be skeptical of today’s assumptions, including US COVID-19 exceptionalism, which presumes that US equity outperformance could continue. Citi analysts are bullish on the US growth outlook, but believe this may now be significantly embedded in equity valuation.
- Instead, Citi analysts see the weak performance of many emerging market equities and their low valuations as potential opportunities. Recent movements in investor positioning in the US dollar suggest widespread bearishness of 2020 has been substantially, if not completely, reversed, supporting the myth of sustained “US exceptionalism.” Yet, the near term hopelessness regarding COVID-19 in Latin America and Asia is overblown.
- Separately, while Citi analysts favored UK equities of late given its unusual discount to US markets and its now cleared political clouds, many continental European firms are at the forefront of “green infrastructure” spending trends, healthcare innovation and the eventual re-emergence of luxury travel. Eurozone equities have been shunned by global investors as COVID-19 has surged again, but Citi analysts believe this too could pass.