#Market Strategy — 11.06.2020

2020 Mid-year Outlook & Themes: When re-opening of economies meets US-China tensions

Investment Navigator - Asia Version [June 2020]


- Our base case scenario of a U-shaped global recovery remains intact. We have further revised down our forecast for 2020 global GDP growth to -3.3%, followed by a rebound to +5.4% in 2021.

- The US administration is likely to position itself as hawkish to China ahead of the Presidential election by heightening rhetoric and tightening some regulations, particularly on technology and financial flows.

 - We highlight 5 key investment themes that on one hand to help preserve wealth in a very low interest rate environment, and on the other hand to grow wealth in the long term.

Gradual re-opening of global economy

Market continues to focus on the progress of re-opening of the major economies. The massive monetary and fiscal policy responses globally have stabilized the financial markets so far, while their effectiveness to revive economic growth remains to be seen.

After around a month of collapse in economic activity, the high frequency global purchasing and traffic activity data has shown a gradual turnaround since mid-April.

The path to normalization for different countries/regions and sectors would be different, depending on the various degree of disruption from the pandemic. From the first-in, first-out experience of China, recovery in manufacturing production tend to lead services consumption by around 1.5 months in general.

Further re-opening will take place in the next few months, but it looks increasingly clear that societies will have to adapt to a “new normal”, with the virus potentially staying for a prolonged period of time until a vaccine is developed and widely distributed. Some sectors, such as tourism and other recreational activities, would suffer, as either severe restrictions continue to be in place or consumers remain wary of crowded places.

While our base case scenario of a U-shaped global recovery remains intact, we have further revised down our forecast for 2020 global GDP growth to -3.3% from -2.5%, followed by a rebound to +5.4% in 2021 (vs +5.6% previously). We expect the Covid-19 shock to have longer-lasting effects on both demand and supply for most economies than we envisaged back in early April, implying a shallower recovery.

The upside risk is a vaccine is produced earlier than expected, providing a boost to economic growth, while the downside risks are

(1) recovery is much slower as stimulus policies are not as effective as we anticipate, and

(2) the worst-case scenario of a second wave with the virus returning in winter, leading to a second round of lockdowns lasting for about four weeks (economic impact may not be as dramatic as the first wave).

Below are our GDP growth forecasts in different scenarios for the major economies. 


GDP growth forecasts in our base case, slow recovery and second wave scenarios

Source: BNP Paribas, as of 1 June 2020

Re-escalation of US-China tensions

The Covid-19 shock has heightened tensions between the two largest economies, and hampered China’s ability to meet its Phase 1 trade deal commitment, particularly to increase its imports from the US by USD200bn by end-2021. There were news reported that China told state-owned firms to halt US farm imports.

With rising anti-China sentiment in America, coupled with the US Presidential election in November this year, the US administration is likely to position itself as hawkish to China by heightening rhetoric and tightening some regulations, particularly on technology and financial flows. Any aggressive measures against China that would also hurt the US economy, which is already in deep recession, are less likely.

Recent announcements from the US include

(1) preventing the Federal pension fund from investing in China equities;

(2) increasing scrutiny of Chinese ADRs (the Senate passed legislation),

(3) tightening restrictions on the sale of US technology and software to Huawei, and

(4) beginning the process of stripping Hong Kong’s special status due to Beijing’s introduction of the national security law in Hong Kong.

While details of the national security law is in the process of drafting and concrete US actions are still unclear, it was a relief for market as the direct impact of all recent measures so far (plus no mention of the Phase 1 trade deal) on the US as well as global economy is very limited.

Our central scenario assumes that the Phase 1 deal will be either preserved or renegotiated (55% probability).

Nevertheless, there is a 45% of probability that the two countries’ increasingly confrontational relationship indicates a high risk of the trade deal falling apart or the US escalating the tensions by unilaterally imposing tariffs or other penalties. This would further weaken market and business confidence, dampening the global economic recovery.

2020 Mid-year Investment Themes

With the backdrop of escalating geo-political tensions and a cyclical recovery post Covid-19, here we highlight 5 key investment themes that on one hand can help preserve wealth in a very low interest rate environment, and on the other hand to grow wealth in the longer term. 

Investment Themes

In anticipation of increased market volatility (in particular in the period getting closer to the US election), the first two are defensive themes, focusing on diversifying portfolios with quality high dividend stocks and lower risk yield plays.

Theme 3 aims to benefit from the macro trend of de-globalization, while hedging political uncertainty through safe haven assets such as gold, and/or portfolios that could take advantage of the dispersion of security performance.  

Lastly, Covid-19 crisis amplifies and accelerates the megatrends of 5G, AI and health tech. Any market weaknesses are good opportunities to accumulate exposure to Theme 4 and Theme 5.

Read more about the five themes: 2020 INVESTMENT THEMES POST COVID-19   


key economic views


The COVID-19 pandemic has intensified pre-crisis tensions between the US and China. This was made worse by the US audit bill passed by the Senate, which threatens to delist Chinese companies who are found to be non-compliant.

The recent National Security Law for Hong Kong approved in the China NPC further complicated matters, with the Trump administration responding by taking away Hong Kong’s special trade status with the US.

Furthermore, purchase targets set in the “Phase 1” trade agreement will likely not be reached given the on-going COVID-19 situation. The trade deal now risks falling apart. Nonetheless, our base case is for the trade deal to survive, which is more beneficial for economies globally looking for a post-COVID recovery.

We still expect a second half recovery for the global economy this year, and into 2021. Given the easing of lockdown measures globally, sentiment and leading economic indicators have started to rebound or bottom. Huge fiscal and monetary measures should aid the return of activities as well.

Post COVID-19 economic recovery in China has also been particularly encouraging, even as the CNPC chose not to focus on GDP growth target for 2020. Global demand is expected to recover very gradually and any second wave of COVID-19 virus will likely hamper economic recovery.


Inflation is likely to recover gradually as policy measures are implemented. Most developed economies should see growth rebounding second half of the year and into 2021. Inflation will likely still fall sharply this year after the demand shock, but should recover next year.

In the US, inflation should fall to approximately 1% this year and recover to around 2% next year. In the Eurozone, inflation is expected around 0% this year and 1% next year. For China, the NPC has recently set a consumer inflation target of 3.5% for the year.



- Equity markets rose in May, buoyed by sentiments on easing of lockdown measures and reopening of economies globally. News flow on possible cures and better than expected economic data also contributed to the ongoing rally.

We expect stock markets to stand higher than current levels by year end, thanks to the prospect of a return of earnings in 2021. Before then, should volatility prevail (due to rising US – China tensions, possible second wave), investors should capitalise on it and accumulate on good terms.

- The recovery has been largely led by growth sectors (mainly Health Care and Technology), whereas Value/ Cyclicals have been lagging. Economies globally will continue to ease lockdowns, while leading economic indicators are starting to bottom out. China’s economic recovery post-COVID has also been encouraging.

We hence believe that it is now timely to turn more pro-cyclical in sector positioning. We upgrade Materials to Positive and Industrials to Neutral, while downgrading Consumer Staples to Negative.

equities table


fixed income

Fed Chair Jerome Powell has once again reiterated that the central bank will continue to use tools such as forward guidance, rates and QE to support the economy. The US Federal Reserve remains convinced that they have enough firepower to do more and are not looking to lower policy rates into negative territory.

We expect the Fed to keep rates on hold and proceeds to fine-tuning adjustments to its QE programmes, such as simplifying the self-certification process for eligibility to the corporate programme or lifting up the 20% limit the Fed can take in an ETF.

Performance of the 10Y US Treasury was close to flat, with yields stabilizing at around 0.7% as investors turn more optimistic given the re-opening of economies globally.

We expect bond yields to rise on a 12-month horizon, as economic data recovers and as government bond supply increases. The rise will likely be limited as central banks will remain big buyers, absorbing a large share of bond supply. Our 12-months target for the US 10Y Treasury yield is 1.25%.

For May, selected EM Asian countries such as India and Indonesia as well as US High Yield saw the strongest fixed income return, as demand for riskier assets started increasing. We are neutral for China fixed income, and are comfortable with the fundamentals for the Chinese property sector as macro data rebounds.




Our GBP forecasts are based on the assumption that the UK avoids a no-deal exit the end of this year, and thus hold a bullish outlook on the GBP over 12 months at 1.32. However, the risks near term look skewed to the downside, as newsflow regarding Brexit remain negative. Both parties are still far apart in negotiation, while the tight timeline is worrying. The UK government has also consistently said they were not looking to extend the Transition Period, adding more woes.


We still see an appreciation potential of the euro and keep our conviction of a weaker dollar. Fundamental drivers remain in favor of the euro while the structural overvaluation of the greenback compared to euro also hints at a sustainable upward trend of the EURUSD in a longer run. We maintain our 12-month target at 1.16





Oil prices are rebounding strongly as lockdown measures and travel restrictions worldwide are gradually being lifted and demand recovers. Supply side is also looking better with lower US inventories and expectations for OPEC+ to extend its production cut.

The combination of a rebound in global demand and a fall in supply should help the price of Brent recover towards $45-55/b in the second half of 2020.


We remain positive on gold, target range USD 1600 – 1800, as its key fundamentals remain in place. With a huge increase in new monetary stimulus by the central banks globally, real bond yields will remain negative or extremely low for longer.

Massive quantitative easing also causes some jitters amongst investors, while geopolitical tensions have also started to re-emerge. These further reinforces the attractiveness of gold as a hedge, particularly against tail risks.



We remain positive on global macro strategy. Central Banks continue to roll out huge bailouts and countries continue to enact massive stimulative fiscal policies. FX and fixed income markets are bound to offer trading opportunities. Increasing deglobalization and differentiated country fiscal policy should also offer more relative value opportunities.


We upgrade Relative-value to Positive from Neutral. The crisis will exacerbate the outcome for bonds, for both survivors and losers, thus creating more attractive long/short opportunities. Despite the recent rally, some RV relationships remain distorted and can be arbitraged now that the tail risk of another illiquidity dislocation has abated.

Additionally, the lower US/EUR rate differential also makes investing in US credits on a EUR hedged basis more attractive.