Blog: You, us, everyone

Top down view after the lockdown

After H1's severe contraction – an estimated cumulative -9.5 % – the world GDP is likely to expand in H2 and onwards. Considering recent turmoil around the globe, the outlook appears to be reasonably optimistic.

The World PMI Manufacturing index recently reached 50.3; however, regional differences do exist. The EU appears to be the most upbeat, with an index value at 54.0, followed by Emerging Economies (51.4) and the US (50.9), while the remaining OECD countries hover at around 48. These varying layers of progress clearly represent the wave of the pandemic wave as it moves from one region to another. 

The recession has been one of the shortest in history; one of the key reasons for this is that both the demand and supply side were hit with restrictions in a virtually synchronized manner, so that neither massive inventory stockpile nor build-up of excess demand resulted.

Despite this favorable trend at an aggregated level, there are some lingering areas of concern. Recent spikes in COVID cases translate regionally into weaker than expected consumer sentiment, lower PMI figures, and a weaker than expected job market. For the time being, governments are ruling out new full-blown lockdowns. Recent observation points towards the creation of region-specific clusters that can be restricted while maintaining normal activity outside the "bubble."

Going forward, if consumers are to return with confidence to prior habits, then consumer sentiment would need to remain high. Unfortunately, this does not seem to be the case. For example, the French populace saved some €11 billion during the four months of the pandemic lockdown. One might have expected that some of these savings would be used for post-lockdown purchases, translating into higher end-point sales. However, such "catch-up" spending has only partially materialized, and we therefore expect a more painful double-dip recession for some regions.

On a geopolitical scale, DM countries appear to be exiting the pandemic crises in a strengthened position, while China will need to deal with the skepticism of the rest of world and face a harsher economic environment. For example, the US's recent measures against Huawei and the forced sale of TikTok’s US operations signal potential turmoil to come. In the past, the conflict was more of a battle of “trade and tech”; this new phase looks like a potential “capital war.”

Stock market valuation

US stock indexes hit record levels, but less than 6% of companies have reached a 52-week-high. The US reporting season ends with published numbers that are better than expected. One might argue that the market is expensive and that there is no value left – but we only partly agree!

We contend that companies that have a proven business model and who can generate EPS growth – while facing the "new normal" – deserve a higher price. Contextualizing all that may help investors to avoid value traps. It could therefore be opportune to look at the PEG ratio (PE / EPS growth). Consider that outperforming technology stocks have an average PEG-Ratio of 2, while the average market has a PEG-Ratio of 2.1. For serious investors, it begs the question: Which one is expensive?