Market Outlook: The Nascent Global Recovery

The global economy is showing signs of recovery. Economic data around the world has broadly outperformed expectations so far. 

While conditions remain challenging for many sectors worldwide – notably tourism and aviation – we see signs that the global manufacturing industry is slowly growing again. The global purchasing managers’ index (PMI) from IHS Markit for July, at 50.3, is at its highest level in six months. A reading above 50 indicates growth, and the higher the number, the faster the growth.

The services industry (sectors like finance, telecommunication, retail, transport, healthcare and other non-manufacturing activities) is also in recovery. The global services PMI increased from 48.0 in June to 50.5 in July, a 13-month high. After months of decline, this uptick indicates modest growth. 

Singapore’s recovery

In Singapore, several sectors have also remained resilient despite the broader economic contraction. According to the Ministry of Trade and Industry’s quarterly economic report, the finance and insurance sectors have grown. Precision engineering, electronics and biomedical manufacturing expanded as well. 

At a time when Singapore’s economy contracted 6.7% in the first half of the year, the government is continuing to support workers and businesses affected by the pandemic. S$8 billion worth of measures were recently announced, including a seven-month extension of wage subsidies and a new initiative to bolster hiring in still-growing sectors.

Risks to the global economic recovery

(a) The vaccine race

At this moment, a full global economic recovery very much hinges on when an effective vaccine is found. Russia has produced the first batch of its new COVID-19 vaccine but there are safety concerns and skepticism among the international scientific community. The vaccine was approved even before it underwent extensive clinical trials that would normally involve thousands of participants over many months.

Even as Russia makes plans to roll out its vaccine by the end of this month, global efforts at finding an effective (and safe) vaccine continue. A recent World Health Organisation (WHO) report showed that 28 candidate vaccines are in the clinical evaluation phase, while 139 others are still in the pre-clinical evaluation phase. These efforts offer some hope that a safe and effective vaccine could be deployed (optimistically) by this year-end or perhaps early next year. If successful, this would give global economies a significant boost. 

(b) US Election Year Politicking 

Another key risk to the global recovery is the US’ own economic recovery, which now appears less certain in light of its impasse on new fiscal stimulus talks – a result of the US election year politicking between Republicans and Democrats. 

The US is the world’s largest economy, accounting for 22% of total economic output. A sharp drop-off in government spending – a reality that could come to pass as Republicans and Democrats remain split over renewed coronavirus relief – could derail the US’ nascent recovery. 

While plans to give eligible Americans a $1,200 payment have been approved, no consensus has been reached regarding unemployment benefits, which expired in July. If not extended, this could lead to a steep drop in income and a consequent decline in consumer spending. 

It also remains to be seen how the US federal government plans to address pandemic-related budget shortfalls among state and local governments. State and local aid will be needed for a sustained economic recovery. Without them, Americans could face the prospect of government layoffs and spending cuts.

(c) Ongoing US-China Tensions

Current US-China tensions appear to be largely brushed aside by market observers as US election year drama and rhetoric by the Trump administration, with little real consequences on the US economy being factored in by financial analysts. However, the continuing deterioration of the US-China relationship could take an unexpected turn with dire consequences for the economy.

Markets are sustaining their momentum 

Notwithstanding the preamble above, as the S&P 500 continues to notch gains, it is worth remembering that the stock market is not the economy. In large part, the substantial liquidity injected by the US Federal Reserve Bank has provided sustained fuel to the US financial markets.

Over the past months, we have seen large indices like the S&P 500 advance to new highs despite economic concerns. Tech, e-commerce and communications-related companies led the charge as consumers stayed in and worked from home. 

Growth stocks in particular have emerged as the clear winner. The main S&P 500 index rose 5.5% in July, but the S&P 500 Growth Index delivered returns of 6.9%. Contrast this with the S&P 500 Value Index which eked out gains of just 3.7% in July.

Cyclical resurgence

Lately, we are seeing signs that the market’s breadth is widening as well. After months of dominance by tech stocks, energy, financial and industrial stocks are now posting gains. In August so far, some of the biggest winners in the stock market have been FedEx Corp., Halliburton Co. and Prudential Financial Inc., all of which have risen at least 11%. 

Transportation stocks are also up this month. This is usually seen as positive reinforcement for the broader market as companies that transport goods, materials and people keep the economy running.

Stay the course

The rally in cyclical stocks should also help allay fears among some investors that a tech-driven rally might be vulnerable to sudden reversals. The strength in more cyclically sensitive sectors provides an important indicator that the market rally might be sustainable, albeit with some degree of uncertainty. 

In the meantime, notwithstanding the market uncertainty, our view is that investors should continue staying the course with their long-term investments. Short-term volatility is still to be expected, so our advice is to put emphasis on diversification and risk-management, even as the economy moves towards a gradual recovery.

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