The midyear investment outlook provides insights into how fund managers view the economy, stock market, and other assets halfway through the year. With the unprecedented impact of COVID-19, fund managers are assessing the depth of the recession, shape of recovery, risk assets valuations, and portfolio positioning. There remains much uncertainty, but most fund managers are cautiously optimistic on continued economic recovery and financial market performance. However, risks such as a second wave of infections, US-China tensions, and social unrest warrant a selective approach.
Fund Managers Expect Gradual Economic Recovery
The economic shock from COVID-19 has been severe, with 2020 Q2 GDP contracting at record rates across major economies. However, recent data such as PMIs indicate activity has bottomed out and is recovering gradually. Fund managers believe the worst is likely over, but the path back to pre-pandemic GDP levels will be prolonged over several quarters. Pent-up demand and policy stimulus will provide upside near-term, but until vaccines are developed, lingering consumer caution and second wave risks cloud the outlook.
Cautious Optimism on Stock Market
Despite rallying over 40% from March lows, fund managers don’t believe stocks are overvalued yet given unprecedented policy stimulus. Earnings uncertainty remains high, but markets are focused on 2021-22 recovery potential. Cyclical sectors preferred over defensives. However, selectivity is warranted given rich valuations of tech and growth stocks. Risks such as US-China frictions and second waves could trigger corrections.
Preference for High Grade and High Yield Bonds
With yields at historic lows, government bonds offer limited upside. Corporate credit is preferred, with central bank support improving technicals. US investment grade and USD EM bonds look attractive on spreads. High yield bonds are gaining favor amid improved liquidity, but defaults remain a concern.
Neutral to Positive on China and Asia Stocks
China’s early pandemic control and policy stimulus support its economic recovery. Fund managers are neutral to overweight China stocks. Other Asian economies face headwinds from soft global demand but valuations look attractive after sharp corrections this year.
Cautious on Emerging Markets Beyond Asia
Slowing growth, EM currency weakness, and pandemic impacts could spur further capital outflows. But value is emerging after massive underperformance, and recovery potential in 2021 could attract bargain hunting.
Overall, fund managers are cautiously optimistic on the investment outlook amid unprecedented uncertainty. The global economic recovery appears underway but will likely be gradual and uneven. Continued policy stimulus and attractive valuations provide support for risk assets, but selectivity and defensive positioning are warranted.