Global Weekly: Equities in the rebound

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Equity markets have rebounded since Monday, overcoming bad news regarding the coronavirus, including an ongoing outbreak in the United States and new clusters of infections in China’s capital Beijing. Equity markets, however, showed resilience.

The equity rebound was fueled by two factors. First, the Federal Reserve bank is still active: the US central bank has signaled that it will buy corporate bonds directly and that it will continue to support the US economy. Second, US data has been very strong, in particular retail sales and homebuilder confidence. This is supportive for the strong rebound in the economic surprise index and fueled expectation of a V-shape economic recovery.

Within this environment, the sectors healthcare and IT have outperformed, whereas energy was lagging. On the corporate side, German payments company Wirecard is suffering from the worst stock slump in the history of Germany, after the company postponed its annual results and said auditors could not confirm the existence of EUR 1.9 billion in cash on its balance sheet.

Bonds: a halt to the massive recovery

US retail sales provided a positive surprise this week and data shows that China’s economy is picking up, although not as strongly as had been previously suggested by some. Overall, it seems that the easing in lockdowns and the enormous fiscal and monetary support programmes introduced optimism and pushed assets continuously upwards during the last couple of weeks.

However, the last few days of trading has put a halt to the upwards trend. It could be that investors realised that the gains had already been enough, especially in consideration of possible negative future events involving, for example, political tensions in Korea, Hong Kong and Brazil as well as between the US and China. A possible second wave of covid-19 cases may also have made investors more cautious.

We currently prefer higher return bonds, which have been recovering some of their covid-19 related losses. When the threat of another spiral in covid-19 cases became apparent, US policies were announced to reassure markets, providing support for all risky assets, including higher return bonds.

Emerging-markets sovereign bond spreads are below 500 basis points, which is a sign of stability. While emerging-markets sovereign bond spreads have not narrowed to the level seen before the virus outbreak, we also do not see them rising further. This is due to the virus now peaking in Latin America, the highest risk region. We therefore do not believe it could get any worse for this asset class.

On the other hand, even though high-yield global corporate bonds have been outperforming tremendously, in line with the equity rally, we see rising risk of losses due to defaults. We also do not count on the same level of government support for this asset class as investment-grade corporate bonds are receiving. Moreover, the rebound in the US economy was stronger than in Europe, helping, in particular, US high-yield corporate bonds. This segment, however, is tilted towards the energy sector and oil prices are expected to remain low (below USD 40) for a long period.

We continue to favour (overweight) emerging markets bonds. Our advised allocation in emerging markets is in hard currency. This is due to increased uncertainty. Any short-term gain from higher yields in local currency bonds could evaporate rapidly with a likely sell-off of these local assets given any related negative news.

In European peripheral countries, as well as in the rest of the world, spreads are tightening. The complexity of the discussions among all EU member countries on how to structure the recovery plan could further widen spreads in the coming weeks. We continue to favour Spain in our allocation to European peripheral bonds.