Global Weekly: The corona-quarter earnings season

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Just before the Easter holiday weekend, the Federal Reserve unveiled another USD 2.3 trillion package in support of the economy. A few days later, the Empire State April manufacturing survey sank to an all-time low, while positive trade data from China supported global equity markets. As the number of new coronavirus cases decreased in several European countries, hopes on a gradual and partial restart of businesses also fueled belief that easing the lockdown may resuscitate economic activity.

On the corporate side, the earnings season made its way to the financial headlines. Apart from the usual attention to the evolution of revenue and profit, investors and analysts will, more than other quarters, focus on balance sheet strength. We expect low visibility on the restart of normal business activities in the upcoming months.

Among the first US companies publishing figures and views, was health-care giant Johnson & Johnson. J&J cut its 2020 view due to the uncertainty created by the coronavirus, but raised the quarterly dividend. The impact of the pandemic was mainly visible in J&J’s medical device department, whereas blockbuster drugs and the consumer-products unit lived up to the expectations.

JP Morgan and Wells Fargo were the first financial institutions to report on the quarterly results. Both companies have set aside billions of provisions for loan losses in the first quarter. In his annual letter to shareholders, JP Morgan CEO Jamie Dimon already warned that the quarter delivered unprecedented challenges as net income fell 69% despite rising trading revenues. Only one day later Citigroup, Goldman Sachs and Bank Of America confirmed this trend.

In the meanwhile, oil prices slid further, despite an agreement between OPEC+ members to cut output by almost 10% of global production as from 1 May. Due to the implosion of industry, transport and traffic because of the corona pandemic, demand collapsed and oil inventories have increased significantly. The stock build-up may even exceed available storage capacity.

In contrast to the difficulties banks and energy companies are facing, some other industries benefit from the economic consequences of the coronavirus. Amazon.com shares reached a new all-time high. The pandemic-induced lockdown boosted the online retailer’s sales. In contrast to other companies, Amazon said it seeks to hire 75,000 workers in order to cope with higher demand in e-commerce.

Bonds: Uncertain consequences

The amount of coronavirus patients has started to slow down in some of the most affected countries, such as Spain and Italy. Reports on economic activity so far, however, will not come in before next month, with the latest figures for April. Last week, the slowdown in infections was a positive for risk sentiment, but investors were not as convinced, with assets retreating slightly.

During the Great Financial Crisis around 2008, we saw a big drop in equities along with all risky assets, including high-quality corporate credits, stabilising to drop even further. With the current level of uncertainty, we prefer not to make any changes to our allocation, as it is unsure whether we have reached the bottom of the sell-off.

Spreads in peripheral bonds have remained relatively stable, proving beneficial for our position in Spanish bonds. It was even better in emerging markets (EMD) and high-yield corporates, supported by the mildly risk-on sentiment, created by investors probably hunting for bargains. Losses in these assets retreated from 15% so far this year, to almost half of it.

We hold on to our current overweight in EMD, given the cash buffer these sovereigns have, the willingness of the International Monetary Fund (IMF) to act as the lender-of-last-resort, and given the volatility of the oil price. Oil is a big driver in high-yield corporates given its substantial share in the energy sector. The rate of defaults is expected to be high. However, the US high-yield sector is, more than Europe, exposed to the energy sector, vindicating our preference for the latter region.

Emerging markets countries that were likely to default before this global recession, such as Argentina, Ecuador and Lebanon, already expressed that their main priority is to contain the pandemic rather than to pay creditors. Nevertheless, if current talks about debt forgiveness turn successful, these countries might become more solvable and we might see a positive surprise.

Overall, public policy measures by governments and central banks seem to have been accepted by investors as good-enough measures to provide liquidity in the first place and to support asset prices. It would be prudent to see their effect in the coming months, however, before making any changes to the investment portfolio.

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