One of the major themes in the crisis has been the growing disconnect between the US stock market and the reality of the economic crisis on average Americans. Around the world, global stocks in several key markets are also out of step with the economic pain felt in their domestic economies. In general, countries with more severe economic contractions expected in 2020 have seen stocks fall sharply. However, stocks in the US, China, Germany, Japan, and India have been notably resilient.
In China, the MSCI China ETF has returned 10.6% YTD, despite the IMF’s estimate for 2020 GDP growth falling by 5 percentage points during the same timeframe.
In January, the IMF forecast that the US economy would grow 2.0% in 2020. As of their most recent forecast in June, the economy is set to shrink 8.0% – representing a delta of -10% for economic growth since the beginning of the year.
Globally, growth expectations have been reduced by 8.2%, with particularly sharp contractions in Western Europe, Brazil, and Mexico where the impacts of COVID have been more severe.
In APAC, GDP forecast revisions have been more mild. The IMF forecasts less economic pain for China and Japan, owing to earlier emergence from lockdown in China and less significant disease incidence in Japan.
In Japan, stocks have been resilient – falling less than 5% YTD. In China, the MSCI China ETF (MCHI) has so far outperformed the S&P500 YTD.
In Europe, German stocks are roughly even YTD, while France, UK, Italy and Spain have all seen 10-20% declines.
Developing markets that are more dependent on commodities have been particularly hard hit. Stocks in Brazil, Mexico, and Nigeria have fallen 25% or more YTD. By contrast, stocks in India have been fairly resilient despite a 10.7% reduction in forecasted GDP growth, which swung from +5.8% in Jan to -4.9% in June.
How the remainder of the year will shake out for global equities remains to be seen, but what bears repeating is that a country’s stocks do not necessarily reflect the underlying domestic economic picture. This is true for many reasons, including concentration of equity indices into pandemic-resistant or cyclical sectors (e.g., technology in the US, mining in Brazil), greater international diversification of revenue for domestic stocks, as well as a backdrop of US elections and geopolitical tensions which will create new winners and losers in certain economies and sectors.