Market Outlook - August 2020

Western Asset Q3 2020 Global Outlook

Western Asset

Executive Summary
  • Coronavirus-related setbacks have meaningfully reduced global growth. However, we believe that the abject pessimism and deep caution that characterised Q2’s market sentiment will abate as an incipient global recovery appears to be gaining traction.
  • In the US, we expect a strong economic rebound in Q3 from what was effectively the first government-mandated recession in its history. However, with social distancing strictures likely to remain in place, the process of complete recovery from the COVID-19 crisis will take time.
  • A eurozone recovery is currently underway on the back of a forceful policy response, but growth across the region will likely be uneven and could become more vulnerable to the reintroduction of economic restrictions.
  • Among EM regions, Asia is best poised to weather the current medical and economic challenges. However, we see continued divergence in growth among economies that have stronger fiscal buffers and those with vulnerable healthcare systems and limited social safety nets.

Western Asset’s base case outlook is for an elongated, U-shaped global economic recovery. While coronavirus-related setbacks have meaningfully reduced global growth, an incipient recovery appears to be gaining traction. We expect the battle against COVID-19 will take time; however, we are encouraged by signs of progress in the global race for a vaccine and the decline in global mortality rates, which suggests that renewed lockdowns are unlikely. Forceful policy action to date has buoyed global economic activity and restored market functioning. We expect central banks to remain extraordinarily accommodative, especially in light of subdued global inflation pressures, and to remain so until the recovery clearly begins and gains traction. Given that the timing and slope of an eventual recovery are the greatest uncertainties, our portfolios are positioned to withstand further market volatility, yet remain flexible enough to capture exceptional value opportunities as they appear. Here, we provide a summary of the key drivers behind our global outlook and  details about where we see value across global fixed-income markets.



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