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During March and April of this year, the global economy and equity markets were hit with a severe shock from the COVID-19 pandemic and the widespread lockdown measures governments imposed in response.

In May and June, the spread of infection lessened in many economies, lockdowns were largely ended, and restrictions eased. Equity markets started a strong recovery, and global economic growth in the third quarter bounced back significantly, but not enough to counter the decline earlier in the year.

During the final quarter, the virus flared up dramatically, including in some countries that had been relatively successful in curbing the virus earlier, such as South Korea and Japan. Restrictions were reimposed in many countries, impacting services heavily yet having a more moderate effect on industry. The recovery in most economies moderated in the fourth quarter, with European economies again contracting.

Nevertheless, global economic growth remains solid. November global manufacturing production grew at the fastest rate in 34 months, while the growth in global services sector activity was just slightly less than the October pace, according to the JP Morgan Global Composite PMI. December economic activity may be slightly weaker.

For the year of 2020, the global economy is estimated to have declined 4%, with only China and Taiwan among the major economies registering positive growth rates for the year. Both advanced-market economies and emerging-market economies excluding China averaged declines of more than 5%.

Global equity markets, however, continued to recover in the fourth quarter, apparently looking forward to a more positive 2021, including the promise of effective COVID-19 vaccines widely administered. Continued massive fiscal outlays and accommodative monetary policies with very low interest rates are expected to provide crucial support for equity prices.

In the face of widespread declines in economic activity, the performance of global equity markets this year was impressive. The year-to-date December 14 gain on a total return basis in the all-country MSCI ACWI Index was 13.05%. Along with the strongly performing US market, international markets overall had a positive year, with the all-country MSCI ACWX ex US Index advancing 7.88%. The performance of individual national markets varied widely.

In Europe, the euro area markets underperformed, with the Eurozone MSCI EMU Index up 5.23%. That included a 6.56% gain in the MSCI Germany Index, a 2.67% gain in the MSCI France Index, a 2.86% loss in the MSCI Spain 25/50 Index, and a 0.15% loss in the MSCI Italy 25/50 Index.

Outside the eurozone, the MSCI United Kingdom Index declined 11.74% year-to-date as a result of a particularly strong second wave of the pandemic and uncertainty about the country’s future outside of the European Union. In marked contrast, the MSCI Sweden 25/50 index has gained 21.14%, and the MSCI Switzerland 25/50 index is up 25.50%.

In Asia, Japan had relatively good success until very recently in dealing with the pandemic, and the MSCI Japan Index’s year-to-date gain was a solid 12.10%. Other Asian markets, particularly those where the pandemic struck early and was relatively well contained, have outperformed. The MSCI South Korea 25/50 Index registered an impressive 33.18% gain, followed by MSCI Taiwan 25/50 Index’s 28.15% advance and the MSCI China Index’s 24.80% gain.

The recovery in Chinese equities slowed in the fourth quarter, while other emerging-economy equity markets continued to strongly outperform advanced-economy markets. For the year, the emerging-market MSCI EEM Index gained 14.38%, while the advanced-economy excluding US and Canada MSCI EAFE Index gained just 5.34%.

Looking forward, a continuation of the global economic recovery, if sustained, could result in a global GDP growth rate of over 5%, which would be the fastest in over 40 years. The year-end economic weakness in Europe and the UK will likely carry over to the first quarter; but vaccine rollouts there, in the US, and in other advanced economies may make possible the relaxation of restrictions during the second quarter, permitting an acceleration in economic activity.

Vaccine rollouts in the hardest hit emerging markets and in developing economies will probably take longer. The lifting of restrictions will likely lead to the biggest GDP growth rebounds in those economies where the restrictions caused the most severe economic contractions. The countries that have been able to contain the virus without nationwide shutdowns, such as China, South Korea, and Taiwan, will likely continue their solid recoveries, providing strong support for the recovery in global trade. The growth in China’s economy, the world’s second largest, is projected to be at least 8% in 2021.

The future course of the COVID-19 pandemic is the major uncertainty in this outlook. On December 21 there were 77.3 million global confirmed cases, with the US leading case growth per capita, with cases also increasing in Western Europe, Asia, and Latin America.

Vaccine rollouts, which have begun in the US, UK, Canada and Russia, could take longer than projected, and new surges or variants of the virus could cause setbacks. Other uncertainties include the still-unresolved Brexit negotiations and future trade and technology relations between the US and China.

The outlook for international equity markets is broadly positive, given the expectations noted above. Equity markets are forward-looking and are likely to look beyond the tough start to 2021, particularly in Europe, to the promise of a more positive medium term. Continued very easy global financial conditions are expected to result from the stated policies of the leading central banks. The maintenance of very low yields on safe assets and central banks’ continued support of risky assets have likely reduced risk premiums.

Also, massive fiscal policy stimulus will continue through the first half of the year, followed by some withdrawal of the exceptional support measures when the apparent need for them declines as the recovery accelerates. The timing of this withdrawal is another uncertainty. There is ample room for low non-US profit margins to strengthen. The expected continuation of US dollar weakness will be positive for global trade and emerging-market prospects.

In our International and Global ETF Portfolios we are almost fully invested, overweight the Asia region, market weight Europe, and maintaining a small cash reserve.