Biweekly International Market Observations (6/18/20)
We continue to offer important market observations in the world of international investing during this extraordinary time with the global pandemic and ongoing response to the coronavirus (COVID-19) outbreak. Below are some key points for the week ahead:
- This week we are taking an in-depth look at all the various policy responses to the epidemic and how the economies of the major markets around the world are faring. The region with the highest fiscal response has been Europe where Germany, France, and the UK have spent amounts equal to 48%, 26%, and 22% of their GDP’s respectively. On top of individual country spending, the European Commission has also agreed to spend €1.85 trillion through various EU programs to stabilize the economies in the region over the next couple of years. Japan is the second highest spender with a stimulus package close to 40% of GDP. Meanwhile, Latin American countries are some of the lowest spending countries with Brazil’s fiscal package equal to roughly 10% of GDP while Mexico is spending barely 2% of GDP. The U.S. is more in the middle and will probably be closer to 20% of GDP in total stimulus when it is over. All this is on top of the massive monetary stimulus that most countries have undertaken where even some emerging economies have begun to employ quantitative easing measures to keep rates low.
- Stimulus packages have also looked disparate across the world. The more export dependent countries, such as China, Japan, Korea, and Germany have been focusing heavily on direct relief for companies. However, more consumer driven countries, such as the U.S., have been focused on support for the individual through direct payments and employment guarantee programs. The need for further stimulus may be more uniform going forward, however, with the primary variables being strength in labor markets over the next several months and the ability to contain second wave outbreaks of the virus.
- The one certainty in both equity and bond markets is that they have become stimulus dependent. The massive rally over the last two months have come on the back of the promise of government stimulus and its ability to cure the economic damage that has been wrought. New estimates for GDP growth around the world show that China may be the only major economy to produce positive growth this year, helped by heavy infrastructure investment. Most of the other G10 countries are expecting GDP declines of 6% or more.
- Equity markets are already pricing in a healthy bounce back in corporate profits and the U.S. market is now at valuation levels not seen since the tech bubble in the late 1990’s.
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