On the February PGIM Global Partners CIO call hosted by QMA, chief investment officers and senior investment professionals from PGIM’s international businesses, PGIM Fixed Income and QMA discussed the recent progress in the fight against the COVID-19 pandemic and the improving outlook for the global economy.
The February CIO Call participants began to see light at the end of the COVID-19 tunnel and expressed increased optimism about the outlook for the global economic recovery and prospects for markets. That optimism is based on improved roll-out of the vaccine enabling the reopening of economic activity and unleashing pent-up demand. While there are near-term risks (new strains of the virus threatening to reduce the efficacy of the vaccines and setbacks in mass production, distribution and administration of the vaccine delaying the return to normalcy), the general consensus was that markets will look past these risks to the economic rebound, which could be brought forward, keeping markets in an uptrend.
Virus and Vaccine Update: New COVID-19 cases are rising by around 500,000 per day globally, on average, over the past week, according to the World Health Organization (WHO), down from more than 700,000, on average, in early January. Progress on vaccine administration has been a major driver in reducing the spread of the virus, particularly in countries that have been most active in distributing vaccines, such as the US and UK. Nevertheless, as countries race to vaccinate their populations, new strains from the UK, South Africa, and Brazil are raising new threats. The UK and South African strains spread easier than the original virus but are not viewed to be deadlier. It is still early to evaluate the Brazilian strain, but reports from Menaus suggest it is also more lethal. Nevertheless, pharmaceutical companies are working on booster shots, where needed, to provide additional protection against the new strains.
On the vaccine front, Pfizer/BioNTech, Moderna, and AstraZeneca vaccines are being administered in several developed and emerging economies. In addition, the Johnson & Johnson vaccine has shown good results in trials (72% efficacy in the United States) and is also likely to be approved by mid-March. The Novavax, Russian, and Chinese vaccines have also shown good results. According to data from Johns Hopkins University, the US has administered over 30 million vaccines, at a pace of roughly 1.3 million per day. The share of the population receiving a vaccine is roughly 10%.
The accelerating pace of vaccine distribution has put downward pressure on US COVID-19 cases, albeit with a lag. According to the WHO, the US has added around 144,000 new cases per day, on average, over the past week. This compares to an average pace of more than 255,000 in early January, representing a 40% decline in just a few weeks. While some of the early January caseload may have been driven by December’s holiday travel, a large part of the decline is likely driven by vaccines. In addition, since those most at risk were given priority to receive the vaccine, the mortality rate is likely to follow the caseload lower.
Outside the US, vaccine distribution is more mixed across countries. Small countries, such as Israel and Bahrain, have outperformed the US, taking a more aggressive approach. However, Europe and the emerging markets are lagging the US and the UK, which have vaccinated a higher percentage of their populations. The UK had rejected European Union efforts to coordinate vaccine purchases, preferring to go it alone. As a result, it was able to avoid some of the coordination problems with purchasing vaccines. In spite of the UK being the epicenter of a new strain of the virus that is more transmissible, new cases are slowing. PGIM India’s co-chief investment officer, Srinivas Ravoori, noted that the Indian government has started the world’s most extensive vaccination program, with a combination of imported and domestically developed vaccines. However, there appears to be some reluctance from the general population to getting vaccinated. Further, COVID-19 cases continue to decline, with active cases now around 83% below September highs.
Economic Rebound on Track: The global economy remains on track to a solid recovery in 2021. Improved vaccine roll-out, after a bumpy start, has set the stage for lifting of restrictions on economic activity, releasing pent-up demand. Additional support from fiscal and monetary stimulus also bodes well for the global economy. As a result, the market consensus and the International Monetary Fund (IMF) continue to upgrade their forecasts for growth in 2021. However, the 2021-22 recovery will likely be uneven, with stronger rebounds in countries and regions that have better controlled the virus and administered the vaccine faster, enabling an early relaxation of economic restrictions.
According to the IMF, many wall street brokers and Ellen Gaske, lead economist, G10 countries, at PGIM Fixed Income, China has already more than recovered to its pre-virus level of GDP. Real GDP in the US is expected to recover to its pre-virus level by mid-2021 and Japan by early 2022. However, the Eurozone is unlikely to reach its pre-pandemic level of GDP until well into 2022. Gaske also pointed out that while massive injections of fiscal and monetary stimulus in 2020 provided a bridge for the global economies to emerge to the other side of the pandemic, the pace of the recovery in 2021 is likely to be driven more by the trajectory of the pandemic and the speed and success in administering the vaccine on a mass scale.
The IMF in its January outlook revised up its forecast for global growth to 5.5% in 2021, up from its 5.2% expectation in October, reflecting stabilizing economic activity and improving momentum in the second half of 2020. The IMF’s upgrade is driven by stronger growth in the US and Japan among the developed economies and by solid growth in India, Brazil and Mexico, among the emerging economies. The stronger rebound in the US reflects expectations of additional fiscal policy support from the Biden administration and earlier and more widespread availability of the vaccine relative to other countries.
The US economy grew 4% in the fourth quarter of 2020, supported by strong gains in consumption and investment spending, though trade and government spending were a drag on growth. The US remains on sound footing, though growth momentum slowed at the end of the fourth quarter as another wave of virus cases and the resulting shutdowns in parts of the country dampened spending. However, the shutdowns were not widespread enough to counteract strength in early Q4 and strength in sectors that were largely unaffected by new restrictions. Gaske expects momentum in household spending to turn positive again during the first quarter of 2021, as the number of virus cases subsides and vaccinations become more widespread. Further, wages and salaries have rebounded back to pre-virus levels, and households have already amassed a huge cushion of savings, which likely got a boost from the $900 billion stimulus package passed in December. Gaske also pointed out that the housing market continues to surge, and residential construction is expected to remain strong, supported by easy financial conditions and ongoing job market recovery.
Meanwhile, businesses focused on the recovery and opportunities to restructure are likely to continue undertaking investment spending on equipment, software, and research and development. QMA portfolio manager Ed Keon shares Gaske’s positive outlook for the US growth rebound. Given the progress on vaccine administration with the US vaccinating at a high rate, about 1.3 million people per day, Keon’s view is that the economic recovery will likely arrive earlier and be stronger than the market currently expects, perhaps starting in Q2 2021 rather than in the second half of 2021, with high single-digit growth or even a low double-digit expansion likely in another quarter. With the Democrats now in control of the US Senate, both Keon and Gaske are looking for fresh fiscal stimulus, likely around $900 billion to 1.2 trillion, with the Democrats pushing for around $2 trillion of stimulus and the Republicans proposing a smaller $600-billion package. This should provide additional fuel to the already-recovering US economy.
As expected, the Eurozone economy contracted in Q4 2020 with GDP declining 0.7% quarter over quarter and down 5.1% year over year. Within the Eurozone, French GDP declined by a sharp 1.4% quarter over quarter, while German GDP edged up 0.1% quarter over quarter, as Germany’s robust manufacturing sector held up. Unlike with the US and Japan, the IMF trimmed its growth forecasts for the Eurozone (to 4.2% from 5.2%) as growth momentum slowed towards the end of 2020 and because growth is likely to remain weak in early 2021 amidst the surge in virus cases, the resulting restrictions on economic activity and a slower roll-out of the vaccine. Consensus expectations are for the Eurozone economy to contract in Q1 2021 by around 2%, with renewed lockdowns and slower roll-out of the vaccine. For Japan, the IMF revised up its 2021 forecast (from 2.3% to 3.1%), but PGIM Japan Chief Investment Officer Seiji Maruyama expects Japanese GDP to contract in the first quarter of 2021 due to weak household consumption from fresh lockdowns imposed on 11 of the 47 prefectures.
Among emerging economies, China is expected to continue to grow at a solid pace, reflecting its more effective pandemic containment measures and aggressive policy response. Latin American growth was revised higher with upward revisions in Brazil and Mexico. Oil exporting and tourism-based economies are expected to see continued downward pressure on economic activity given a slow recovery in cross-border travel and a subdued outlook for oil prices.
The IMF revised up its forecast for India to double-digit growth (11.5% from 8.8%) rebounding from the sharp contraction in 2020. These expectations seemed to be validated by the big fiscal expansion announced by the Indian government in its latest budget presentation on February 1st. As PGIM India’s Ravoori and co-chief investment officer Kumaresh Ramakrishnan pointed out, the government shifted its focus from fiscal consolidation to growth, with stepped-up government spending, especially in infrastructure areas. The government appears committed to supply-side reforms to kick-start the investment cycle, which is critical for India’s medium-term growth prospects. This is likely to be a positive for Indian stocks.
Taiwan’s GDP grew 4.9% year over year in Q4 2020 on stronger-than-expected electronics and IT exports, which helped lift 2020 GDP growth to 3%. PGIM SITE Chief Investment Officer Bevan Yeh and the Taiwan team expect Taiwan’s 2021 GDP to expand faster than official expectations, around 3.8%, given extremely tight supply at Taiwanese chipmakers and higher capex spending and continued re-shoring of manufacturing.
The Bottom Line:
In the summer and fall of 2020, the global economy emerged from the deep recession faster than expected, powered by the unprecedented monetary and fiscal stimulus. Fears of a long, drawn out recession did not materialize. In a repeat, the economic rebound in 2021 may be quicker and stronger than earlier expected, as an expanding vaccine roll-out is enabling better control of the virus, leading to faster reopening of economic activity and unleashing pent-up demand. However, it appears that the recovery is likely to be uneven across countries, with stronger rebounds in countries and regions that have better controlled the COVID-19 virus and have a faster vaccine roll-out, enabling early relaxation of economic restrictions.
While the February CIO Call participants can see the end of the COVID-19 crisis and expressed increased optimism about the speed and strength of the economic rebound, they highlighted near-term risks, with new strains of the virus threatening to reduce the efficacy of the vaccines and setbacks to mass production, distribution and administration of the vaccines delaying the return to normalcy. Further, while the general consensus was for further market gains, the call participants cautioned about increased volatility given these risks and against a backdrop of rich valuations following the big gains thus far.