Investment Update News flash

The two faces of the health crisis

With the evolution of the pandemic still dominating headlines, we believe this global crisis should in fact be viewed as a multi-tiered crisis. Health conditions vary, with each geographic region currently at a different stage in terms of fighting the epidemic.

The US is now the No. 1 global hotspot, and more than half its population is now confined. As a result, unemployment has skyrocketed in just two weeks’ time. Last week, 3.3 million people had filed for unemployment. This week, that number climbed to 6.5 million, for a grand total of 10 million in two weeks. This can be attributed to the extensive flexibility of the US job market: one-third of the workforce hold precarious employment, work flex-time hours, hold fixed-term employment contracts and/or are paid by the job. It is also much easier to lay off workers in the US than in Europe. Consequently, this figure can be expected to keep on climbing if businesses remain closed for an extended period.

As the epidemic spread across the country, the US changed tack and even Donald Trump is being forced to adopt a cautious approach, having extended social distancing guidelines through end-April. Estimates on the number of deaths released by the US president also have the markets worried. According to the White House, limiting the number of deaths to 100,000 would be a “very good job”.

Meanwhile in Europe, according to the WHO, signs have begun to surface indicating that the number of cases is stabilising, particularly in Italy where the number of new cases per day has been on the decline over the last few days. That would mean the worst-hit country in Europe has crested the peak of the epidemic, providing ample evidence that the confinement measures taken to curb the spread of Covid-19 are working.

To understand the impact of confinement measures, it is instructive to look at the economic impact and rebound in China, which is once again serving as the world’s factory.

After hitting a record low in January and February, China’s economic activity took off again in March, with the PMI for services and manufacturing alike confirming that activity has improved significantly since deconfinement. Even so, the country has had the wind knocked out of its economic sails, especially as other regions of the world are still struggling to manage and contain the spread of the epidemic. As a result, Chinese order pipelines continued to fall in March.

And that is where the greatest challenge of this crisis lies: in such an inextricably linked global economy, all regions are interdependent, and the varying degrees to which the virus is spreading and confinement measures are being taken could make the situation last for some time. It thus remains to be seen how long the crisis will last, and if the fiscal and monetary stimulus measures implemented around the world will be enough to breathe new life into the economy.

Equity positioning

In the wake of an extremely volatile period (with the VIX hitting 83%!) and a record equity market contraction (the S&P 500 shed 34% in 33 days, dropping to a low of 2,237 points), the markets were reassured by the stimulus plans launched the world over. That said, rate cuts were not enough and the central banks had to turn to massive asset purchase programmes: the Federal Reserve (Fed) increased its balance sheet to $5.86 trillion in the last three weeks and the European Central Bank (ECB) set an APP target of €1.1 trillion by the end of the year, which will probably end up being raised. This central bank support has paved the way for massive government fiscal stimulus plans. On the other side of the Atlantic, Washington finalised its new budget plan, now estimated at $2.2 trillion, and even then some were already raising the possibility of an additional aid package. 

To understand the impact of confinement measures, it is instructive to look at the economic impact and rebound in China, which is once again serving as the world’s factory.

Despite these measures, however, we do not see market volatility returning to normal levels until the end of the tunnel can be seen for this crisis (slowdown in the spread of the virus, termination of quarantine measures, creation of a vaccine, access to medicine, etc.). Until then, the markets will continue to be dictated by the progression of the epidemic, government stimulus plans and changes in quarantine periods.

In these highly uncertain times, we plan to stick with the communication, health care and real estate sectors.

Defensive stocks in other sectors may prove attractive, such as gold or consumer staples. As pointed out in our last weekly comments, we will also continue marginally and opportunistically taking advantage of attractive valuations on quality companies to build long-term positions. 

Bond positioning

Most central banks are currently pulling out all the stops to counter the impacts of the coronavirus. While emerging country central banks may only be able to lower their rates, the sky’s the limit in terms of monetary support measures available to major central banks in developed countries.

The ECB recently repealed any limits in terms of sovereign and corporate debt purchases, indicating that it will not restrict itself to previous announcements, especially considering that debt is needed to fund European government measures. 

The additional APP was launched very quickly, just last Thursday, underscoring the limitless funding that the ECB will provide to help the European governments implement stimulus measures. This will keep sovereign yields under pressure, and should limit the risk of seeing spreads between APP candidates widen excessively.

The same unconditional support has been shown in the US, where the Fed unleashing an unlimited Treasury purchase plan to finance support measures, and stating it would also buy up mortgages and corporate debt.

In this environment, European periphery sovereign yields are attractive in our view, as is Investment Grade corporate debt. Nevertheless, we will be carefully monitoring downgrade risk for certain issuers in the High Yield segment, and recommend keeping a close eye on the quality of their balance sheets.

Overall, the portfolios we manage are still proving more resilient to the downturn than the markets. The reason for this is a stock-picking strategy based on a fundamental approach that emphasises a healthy balance sheet and therefore a manageable level of debt for each business. At present, we prefer investing in defensive equities. We are also trying to take advantage of current opportunities to strengthen some of our portfolio positions by adopting a step-by-step strategy. 


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This document was produced by the Private Banking Unit and BCEE Asset Management. The drafting of this document was completed on 03 April 2020 at 10:00 pm.

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