Global Weekly: Volatility remains in place

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As unprecedented conditions created by Covid-19 demand unprecedented measures, the US Federal Reserve announced unlimited purchases of government bonds and mortgage-backed securities. In addition to the measures taken by the central bank, the US Senate agreed on a deal to support the US economy. It took a few attempts to reach an agreement over a package of USD 2 trillion.

At the same time, the impact of the Covid-19 virus on society has become more visible in everyday life. Lockdown measures have become the new standard for a quarter of the world’s population. Simultaneously, economic life almost came to a halt. In Europe, the collapse of economic activity was illustrated by eurozone Markit PMI, which measures business activity, dropping to its lowest level ever. German and French data show that the services sector, the main driver of the Markit PMI composite index and the cornerstone of the economic recovery, strongly declined.

After some hesitation, investors carefully returned to equity markets following central bank and government aid packages. First steps were made in Asia, where the outbreak of the Covid-19 pandemic looks to be under control. South Korean stocks staged a firm recovery, as the government simultaneously announced measures to stabilize financial markets. When life can slowly return to normal, Asian consumers are expected to be the first to start spending again.

Although oil prices barely recovered from fresh lows, stocks of oil & gas producing companies recovered part of their losses after several dismal weeks. Similar to other sectors, companies continued to postpone investment plans, cut dividends and suspend stock buybacks. Financials and cyclical stocks have benefited the most from the support packages announced by central banks. In return for flexibility to grant loans, banks will get more leeway from central banks. Because of the recovery of energy and financial stocks, eurozone stock markets that had fallen deeper than other regions, recovered at a faster pace. Sectors, such as health care, utilities and consumer staples, that had outperformed markets when stock prices were falling, lagged market performance during the stock market recovery this week.

On a company level, Nike posted their quarterly results. Even though sales declined in Greater China because of shop closures during February, results were better than feared. The stock rose by more than 9%. Boeing made a remarkable recovery, rising by more than 60% in just three days. The US rescue package also provides funds for the struggling airline business. Finally, the biggest beer brewer in the world, AB Inbev, withdrew its 2020 outlook and said the sale of its Australian subsidiary would be completed in the second quarter, instead of the first. The stock rose after this announcement, which could imply a lot of bad news has already been priced-in.

Bonds – Waiting for infections to retreat

Coronavirus obviously continues to be the major theme affecting investment decisions. Asia, and, in particular, Singapore, Korea and China, have managed to contain infection cases at least for now. Markets there are also less affected. Meanwhile, Europe and the US appear to have become the epicentres. Many places not yet affected, such as India and in Latin America, have been taking preventive measures, such as imposing lockdowns, so as to avoid the high number of cases seen in Italy.

Year-to-date, as investors seek to avoid risk, high-quality investment-grade bonds have been outperforming, while higher-risk assets have sold off. Emerging-markets bonds put up slightly more resistance than corporate high-yield bonds, owing to government interventions and due to emerging-markets debt being partly investment-grade. Our preference for emerging-markets bonds is tilted towards safer assets in the Middle East, Europe and North Asia, while we try to avoid countries with (previously) deteriorated fiscal situations, such as South Africa, Ecuador, Lebanon and Argentina. This latter group of countries could possibly consider debtholders as a less important priority when fighting a pandemic.

The drops in the equity market, which signal the attitude of investors, have not been as deep as in the financial crisis of 2008. This signals some optimism that the effects on economic activities will not be as large, and there could be at least a partial recovery to the path before the pandemic expanded worldwide. It is hard to spot the bottom, however, and to identify a good moment to start allocating more risk to the portfolio. This week saw some buying interest, but with low volumes and mounting coronavirus infections, we are not there yet.

There have been announcements of government loan lines, possible nationalisation of companies, and the US Senate has signed a USD 2 trillion rescue plan. They all are a means of financial relief and should be reflected in a rise in bonds prices, but so far the market seems first to be waiting for the pandemic to be contained.

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