| Jul. 7, 2020
FAQs on the Markets and Economy
What is the outlook for EM Asia equities?
We believe both the near term and long term outlook for EM Asia
equities continues to be attractive.
In the near term, Asian economies are expected to be among the first
to recover globally from the COVID-19 crisis, amid billions of dollars
in stimulus and relatively effective virus containment.
Bright spots have already emerged, such as improving Chinese data
for consumer demand and industrial output, as well as sizeable
rebounds in June PMIs across the region.
At the same time, most of Asia’s emerging markets are better
equipped to manage any potential resurgences in the virus, given a
strong testing and contact tracing infrastructure in place.
Persistent low interest rates in the U.S. are also a positive, helping
take pressure off EM central bankers, strengthening Asian currencies
and reducing costs on emerging market companies with dollar-denominated
debt.
For long term investors, our proprietary 4Ps Framework analysis
continues to indicate the investment opportunity is compelling.
The region’s growth outlook remains resilient, supported by robust
demographic and urbanization trends and high investment rates. EM
Asia also boasts a superior earnings growth profile, particularly vs.
other non-US developed markets, and remains attractive relative to
other geographies.
What is Fed Chair Powell saying about the U.S. economy?
The reopening of the economy happened sooner than the Fed
expected.
The data shows an upturn in spending (see spending question) and
a significant increase in hiring. In the past two months, nonfarm
payrolls have increased by 7.5 million (see labor question).
The increase in economic activity is very welcome news.
But at the same time, the lifting of the lockdowns carries some
risks. This can be seen in recent increases in coronavirus infections
and hospitalizations.
Powell warns that the path of economic growth is dependent upon
successful containment/control of the coronavirus.
With the lockdown lifting, have households gone out and spent some of their money?
Following weeks of being confined at home and pent up demand for
many goods and services, shoppers went out and “shopped ‘til they
dropped.”
Consumer spending rose a record 8.1% in May. The previous monthly
record increase was just 1.3% in 1999. This would be very impressive
if it were not for the significant declines in spending over the
previous two months (-12.2% in April and -6.4% in March). Personal
consumption expenditures (which measures spending on goods and
services) is down 11.7% since the February peak.
Personal income fell 4.2% on the month, but that follows on
the heels of a 10.8% increase in the previous month. In the past
couple of months, the federal government has made significant
payments to households (e.g., $1,200 stimulus checks and enhanced
unemployment insurance), which has boosted income.
Despite the increased spending and reduction in income, the savings
rate remains elevated at 23.2%, down from April’s record 32.2%
(chart). We believe households are stretching the aid money until
they are sure they have jobs to return to. Although payrolls have
jumped 7.5 million in the in the past two months, it is still 14.7 million
below the February level.
What did we learn from the recent labor report?
The labor market has improved substantially in the past two months.
June nonfarm payroll surged a record 4.8 million. Add that to
the May gain, and 7.5 million people have returned to work. The
unemployment rate fell to 11.1% from 13.3% in May, and both are
below the April high of 14.7%.
This good news sets the stage for economic improvement. But to
put some context around these numbers, even with back-to-back
record increases in nonfarm payrolls, it stands 14.7 million below
the February record high of 152.5 million (chart). The unemployment
rate is still at elevated levels. It was above the previous record high
of 10.7% in 1982. It was just 3.5% in February.
The data reinforces the belief that the economy is still fundamentally
strong and should facilitate a robust recovery. The trajectory of the
recovery could be highly dependent upon the pace of getting the
pandemic under control.
What are earnings growth prospects like for 2H20 and ahead?
After the best quarter for U.S. stocks since 1998, equity valuations
by some measures are now at the highest levels in two decades, and
a recovery in earnings will likely be key for markets to take the next
step higher.
The Q2 earnings seasons begins in the next few weeks, which should
mark the worst of the entire pandemic cycle. Companies will be
reporting on results for the April through June period, when much of
the economy was shut down.
As of now, S&P 500 earnings are estimated to have declined -43.9%
over the quarter, which would be the largest year-over-year decline
since Q4 2008 (-69.1%). However, with so much uncertainty
surrounding the impact of the virus, reported results are likely to take
a backseat to company guidance as investors try to get a handle on
how businesses are functioning and what growth potential there is in
the back half of the year and into 2021.
Investors have been increasingly optimistic and forward looking since
the March lows, eyeing a recovery in corporate profits beginning in
the third quarter. In fact, after hitting its lowest level in 18 years,
sentiment has shown a significant change in tone recently with
analysts raising their EPS forecasts for the second, third and fourth
quarters.
We believe valuations can remain elevated going forward given
the unprecedented amount of stimulus, record-low interest rates, lack of inflation and lack of attractive alternatives to equities.
Nevertheless, earnings expectations will likely take over as the
primary driver of market returns in the months ahead.
Overall, CNR expects S&P 500 earnings to decline by about 27%
in 2020 before growing 30% in 2021.
