Asset allocation in the next stage of the COVID crisis

So long as the revival in the global economy continues, even if only gradually, we forecast that “risky” assets will resume their comfortable outperformance of “safe” ones. We do not buy the argument that a retail-driven bubble has formed in equity markets that is at risk of bursting almost whatever happens to the economy. And the major central banks have made it clear that their massive policy support, an important driver of the rebound in most risky assets from late March to early June, will remain in place for the foreseeable future. But, at the risk of stating the obvious, this outlook depends on the ability of major economies to get, or keep, coronavirus under control without slamming the brakes on activity again. China and Europe are so far succeeding on that front, but there is an open question about the US. As yet, we have not seen conclusive evidence that the surge in cases there has sent the economic recovery into reverse, which is in part why risky assets are only slightly below their levels in early June. But the possibility of this changing is a big threat to our forecasts.