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A prolonged period of US dollar gains has reversed abruptly. The policy revolution to cushion the pandemic’s blow is a key driver, as it has eroded the dollar’s interest rate advantage and helped lift risk appetite off its March trough, in our view. The different restart dynamics in the US and Europe have also pressured the dollar, underscoring our preference for European equities and caution on US stocks.

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Macroeconomic policy has gone through a needed revolution to cushion the coronavirus shock. It essentially aims to “go direct” and is blurring fiscal and monetary policies. Yet this policy shift has opened the door to unprecedented government intervention in markets and companies, and we see it as a slippery slope - unless it comes with proper guardrails and a clear exit strategy.

We have turned more cautious on emerging market (EM) local debt despite depressed valuations after recent selloffs. Some EMs have allowed their currencies to weaken to help absorb the economic shock, and we see a risk of further currency declines in selected EMs that could wipe out coupon income. We are still overweight equities and credit in Asia ex-Japan, with China gradually restarting its economy and readying more policy support.

It’s important to keep a long-term perspective amid market volatility – such as the extraordinary moves of recent weeks. One enduring trend we see is a move to sustainable investing: a structural shift in investor preferences leading to large and persistent flows into assets perceived as more resilient to sustainability-related risks such as climate change. Investors rebalancing portfolios after the risk asset selloff may consider leaning into sustainable assets.

Drastic market moves in recent weeks – triggered by fears of the coronavirus outbreak and its economic toll – have likely thrown many portfolios off their broad asset class benchmark weights. Sharp equity selloffs and government bond yield declines have mechanically turned many portfolios underweight equities and overweight bonds. We favor rebalancing toward benchmark weights, but recognize that timing and implementation will vary by investor.

The spread of the coronavirus beyond China has opened up a new global dimension to the epidemic – and potential for a sharper economic drag from efforts to contain it. We expect the economic expansion to remain intact, albeit on a lower track. We see a sharp rebound once potential disruptions dissipate, yet the unknown depth and duration of the shock add material downside risks. As a result, we have pulled back our moderately pro-risk stance to benchmark weights.

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