Coffee Break 4/6/2020

LAST WEEK IN A NUTSHELL

  • The US published their March job report. The economy lost 701k non farm payrolls but the March survey reference periods predated many coronavirus-related business and school closures.
  • Global services and composite PMI’s confirmed the sharp deterioration in survey data. The latest numbers bear little information on the current state of the economy, making it difficult to value financial assets.
  • The euro zone final consumer and business confidence data took a hit as both are struggling with the impact of the coronavirus.
  • In Japan, the Q1 Tankan survey was published and its decline is in line with the other regions.
  • In the UK, Sir Keir Starmer won 56.2% of the vote and will replace Jeremy Corbyn as leader of the Labour party. 

 

WHAT’S NEXT?

  • The most timely indicator on the plunging US economy is the weekly jobless claims. The numbers are skyrocketing as a lot of sectors are severely affected at the same time throughout the country.
  • The White House announced that fatalities linked to the coronavirus could hit 100,000-240,000 even with social distancing policies in place.
  • The Federal Reserve will publish the minutes from its March 15th emergency meeting. Central banks in Australia and South Korea are also due to publish decisions.
  • The Eurogroup will hold discussions on the common economic response to the coronavirus crisis.

INVESTMENT CONVICTIONS

  • Core scenario
    • We are watching 5 different triggers: Epidemic-linked indicators including an exit strategy, Market risk, Activity resumption, the Policy response and Valuations. In Europe, confinement measures are still in place but investors are increaslingly looking for indications on the exit strategy towards the anticipated post-coronavirus period.
    • Currently, we expect economic growth to contract as the measures that can minimize the human cost of the outbreak are economically costly.
    • Weak economic data, significant downward earnings revisions and dividend cuts are being integrated in analysts’ forecasts.
    • In the medium term, policy easing from virtually all central banks and upcoming fiscal easing represent a support. The Fed, the ECB and the BoJ have already eased policies further, they are ready to take additional easing measures as needed and are encouraging fiscal stimulus if only to bridge the gap of the loss in revenues for households and businesses.
    • From a short term perspective, volatility is here to stay as visibility remains low. From a long term perspective, equity markets are offering value and represent upside potential.
  • Market views
    • Since the onset of the Covid-19 crisis, we are looking at the depth (deep), diffusion (global) and the duration (longer than initially thought) to assess the economic pain of the coronavirus. This is challenging to assess as the whole international value chain is impacted.
    • Fiscal and monetary policy responses will outlive the virus. Monetary policy responses aim at ensuring ample liquidity and for some countries, further asset purchases programmes.
  • Risks
    • In the short term: the coronavirus is a risk until it is contained or a vaccine is found, successfully tested, mass-produced and commercialised.
    • In the medium term:
      • Domestic political issues in the US. The coronavirus is wreaking havoc in the election campaign calendar. More than 15 Democratic primaries have been postponed and the Democratic convention has been pushed forward by one month into August.
      • Trade negotiations between the UK and the EU. EU's chief negotiator Michel Barnier had tested postive for COVID-19 as did UK Prime minister Boris Johnson. As “Brexit” is taking a back seat and companies are fighting to survive, the withdrawal could again be delayed beyond 31 December 2020.

     

    RECENT ACTIONS IN THE ASSET ALLOCATION STRATEGY

    We have trimmed our equity exposure in the light of the most recent information and the sharp market rebound. We do not see an exit strategy in Europe yet and there is a lack of visibility on the epidemic outbreak in the US and the economic impact of containment measures. In the fixed income universe, we remain cautious about exposure to government rates in Europe as central bank buying and deterioration in public finances will be huge. Credit and High Yield spreads have spiked but our strategic views have not changed. We stay diversified via alternative strategies. We keep our strategic stance on Emerging debt and we continue to hedge via gold and the JPY, among others.

     

    CROSS ASSET STRATEGY

    • Given the lack of visibility, our equity exposure is slightly underweight.

      • We are slightly underweight UK and US equities. We do not see an exit strategy in Europe yet. There is also a lack of visibility on the epidemic outbreak in the US and the UK and the economic impact of containment measures.
      • We are neutral EMU, Emerging market and Japanese equities. Uncertainty surrounding the coronavirus weighs on investors’ sentiment.
      • We keep key convictions in various thematic investments. Oncology and Biotech sectors prove relatively resilient in the current context and reveal high growth potential driven by innovation and pricing power. Climate action themes enable exposure to key solutions for a cleaner future.

      We are underweight bonds, keeping a short duration and diversify out of government bonds. The current environment has the potential to create opportunities on bond markets as well.

      • We expect bond yields to stay low but creep up gradually over the medium-term.
      • We diversify out of low-yielding government bonds. In credit, we keep Emerging debt, including EM-issued corporate bonds. We note that the US High Yield rate jumped to over 9.2% while the Euro High Yield rate has now a yield of 7.5%.
      • We keep an exposure to gold and JPY, which both play the role of safe haven.