Non-U.S. stocks: A potential opportunity amid the market mayhem?

On the latest edition of Market Week in Review, Senior Investment Strategy Analyst Alex Cousley and Senior Client Investment Analyst Chris Kyle discussed catalysts behind the ongoing market volatility, the uptick in COVID-19 cases and what to expect from China’s recently announced five-year plan.

Markets sell off amid COVID-19 surge, Election Day jitters

Equity markets in the U.S. and Europe fell sharply the week of 26 October, with both the S&P 500® Index and the STOXX® Europe 600 Index down approximately 6% on the week, as of mid-morning Pacific time on 30 October. The selloff is primarily being driven by the uptick in COVID-19 cases across Europe and the U.S., Cousley said, adding that pre-U.S. Election Day jitters are also likely contributing to the volatility.

“A common theme that’s surfaced over the past week is that both U.S. and European equity markets are underperforming global equity markets, with both Japan and emerging markets in particular faring better,” he remarked. Amid this backdrop, Cousley and the team of Russell Investments strategists believe that non-U.S. equity markets may provide better opportunities moving forward-regardless of the election outcome in the U.S.

“While the U.S. elections are likely to present some short-term volatility, we believe that the ongoing economic recovery and progress toward a vaccine for COVID-19 will likely influence markets more over the medium-term,” he said. With this in mind, any volatility in response to the 3 November elections could present a buying opportunity for risky assets, particularly in non-U.S. markets, Cousley stated.

As for potential outcomes, he noted that while most polls suggest that Democratic presidential nominee Joe Biden will prevail over Donald Trump in the race for the White House, the 2016 election shows that anything is possible on Election Day. One of the potential scenarios is a blue wave, wherein the Democratic party wins control of both chambers of Congress as well as the presidency. This outcome would likely lead to a slight increase in U.S. Treasury yields, given that a unified Democratic government would probably enact a larger fiscal stimulus package, Cousley said.

“If this blue-wave scenario plays out, this could give a boost to more cyclical parts of the market, such as value stocks and non-U.S. stocks,” he concluded.

The latest on COVID-19: Renewed lockdowns in Europe, positive vaccine developments

Turning to the latest COVID-19 developments, Cousley said that the resurgence of the virus in Europe is concerning. Both France and Germany recently announced new measures to combat the uptick in infections, he noted, with France now in a nationwide lockdown until 1 December.

“The lockdown measures in France are more severe, and potentially more damaging to the European economy, but Germany is also imposing new restrictions, including shuttering its bars and restaurants for several weeks,” he said. Meanwhile, as the virus spreads rapidly in parts of the U.S., partial lockdown measures are taking root in some cities, notably Chicago, Cousley added.

On a more positive note, the week of 26 October delivered some encouraging news in the race for a COVID-19 vaccine, he said. “Both Pfizer and Moderna’s vaccine candidates are in late-stage testing, with data likely to be released in November. Depending on the results, emergency-use authorisation from the U.S. Food and Drug Administration could be granted late this year or in early 2021,” Cousley explained.

In addition, on 27 October, drugmakers Sanofi and GlaxoSmithKline announced a pledge to provide 200 million doses of their vaccine candidate, if approved, to the World Health Organisation’s global immunisation initiative, Cousley said. “This initiative, known as COVAX, aims to deliver 2 billion doses of COVID-19 vaccines worldwide by the end of 2021-particularly to countries that are more fiscally constrained and unable to pay for a vaccine,” he stated.

Ultimately, while the rise in COVID-19 cases in Europe and the U.S. is concerning, the latest developments around vaccine efforts offer some hope, Cousley concluded.

Key challenges confronting China as new five-year plan announced

Switching to China, Cousley said that the Chinese Communist Party (CCP) announced the outline of a five-year economic plan on 29 October, with the full details to be released during the National People’s Congress in March. 

“While the specifics of the plan aren’t known yet, we do know that China is facing four key challenges that this plan will try to address: a reliance on foreign technology, income inequality, inadequate social security coverage and pollution,” he explained.

Cousley said that China’s dependence on foreign technology isn’t a new issue, and that the country continues to pour money into areas like semiconductor manufacturing in order to address this. The government has also taken steps to tackle income inequality and inadequate social security, he noted. In addition, as part of its growth strategy, China is aiming to boost domestic demand.

“In the past, China’s economic growth has been primarily powered by exports, and the country is now looking to shift toward a model driven by domestic consumption,” Cousley explained. This shift will likely lead to more government stimulus, in order to encourage individuals to spend money and reduce the country’s high savings rate, he added.

China is also putting a lot of money into green energy in order to fight pollution, Cousley said, adding that he believes this will be another key priority of its five-year plan. All in all, the growth prospects for the country look strong over the next 12 months, he concluded. 

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Any opinion expressed is that of Russell Investments, is not a statement of fact, is subject to change and does not constitute investment advice.

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