Although the global economy is on shutdown, there is a glimmer of hope to be found in the action taken by central banks and governments. The US Federal Reserve (the Fed) and the European Central Bank (ECB) in particular are each making use of the vast Quantitative Easing (QE) programmes we have seen since the 2008 crisis. We would like to point out that the Fed has committed to an unlimited purchase programme that also includes corporate bonds. Meanwhile, the ECB has also launched the highly ambitious Pandemic Emergency Purchase Programme (PEPP), which is worth EUR 750 billion. What's more, the ECB’s self-imposed issuer limit has been lifted for this programme. As a result, it may hold more than 33% of a country’s debt —a major stumbling block in the past as the limit was almost reached for Italian debt.
The difference this time is government support, which can be described as very solid. In the US, the Senate approved a stimulus plan worth USD 2 trillion, i.e. around 10% of US gross domestic product, while in Europe, the European Commission lifted the budgetary limits imposed by the Stability and Growth Pact.
Germany, for example – the largest economy in the eurozone – announced a budgetary stimulus policy worth nearly EUR 800 billion. The overall aim of these stimulus plans is to prevent bankruptcies, defer business loan payments and also to protect the most financially vulnerable households.
Once the peak of the epidemic is behind us, the return to normal may well be quicker as a result of these measures.
As mentioned in the last weekly update, the markets appear to have entered a phase of price consolidation since the end of last week. In practice, this has been reflected in decreased volatility, as the VIX index has come back down to around 60 basis points after soaring to over 80 at the start of last week.
The prospect of the new stimulus plan in the US continued to support the markets at the beginning of the week. In addition, some US operators who were regarded as highly exposed had good news to share regarding the impact of Covid-19 on results for 2020 and 2021. Their ability to withstand the shock fuelled a bullish surge on Tuesday when the Dow Jones had its best day since 1933, closing up +11,4%, while the S&P 500 rose +9,4% and European markets also gained ground, climbing +9,2%. Securities of companies that had hitherto experienced a rough ride (restaurant chains, airlines, producers/vendors of non-essential consumer goods and industrial conglomerates) naturally came out ahead.
The overall aim of these stimulus plans is to prevent bankruptcies, defer business loan payments and also to protect the most financially vulnerable households.
But does this upturn mean that the crisis is over? Let's not get ahead of ourselves. The actual impact of Covid-19 on the world economy has yet to be measured and the forthcoming quarterly publications will reveal the initial trends. We should also mention that the renewed sense of optimism in the markets is being buoyed by Donald Trump’s reluctance to commit to a hard lockdown policy, as he is particularly mindful of the harm this could do to the economy and the financial markets. The United States is not immune to the pandemic, however: the virus is spreading rapidly, at a rate of well over 33% per day, and this situation may leave him no choice.
Ultimately, even if there is no return to a long-term upward trend, we still believe that the pronounced shift in sales has given way to a more rational approach, with some investment opportunities on the horizon as a result. High-quality businesses operating in highly exposed cyclical markets are potentially showing attractive valuations. In our view, these investments should nonetheless be made strategically and sparingly for the time being, and continue to favour more defensive stocks such as gold companies, utilities, consumer staples and healthcare.
Last week kicked off with were two major announcements: In the US, the Federal Reserve is promising monetary easing for an indefinite period and Congress is putting the finishing touches on a wide-ranging economic stimulus package.
The Federal Reserve announced that it was buying as many US treasury bills as necessary, along with mortgage-backed securities, in an endeavour to support the fixed income market and keep it operating effectively. Furthermore, for the first time ever, the institution intends to intervene directly in the primary and secondary corporate debt markets. Lastly, the Fed reserves the right to purchase bond ETFs on corporate debt should the need arise.
On Tuesday, chief negotiators reported that a bipartisan agreement had been signed for a massive stimulus plan to respond to the crisis generated by the Covid19 pandemic. Congressional and government leaders worked arduously for days to get an economic stimulus plan worth around USD 2 trillion adopted as quickly as possible. The plan includes direct payments to taxpayers as well as other stimulus measures. The Senate approved the final text of this agreement on Wednesday.
The two announcements at the weekend helped reinvigorate the markets: the spread between corporate and sovereign debt yields narrowed, while the latter category, a safe haven during periods of high volatility, saw rates rise.
In Europe, there were similar fluctuations for core sovereigns. By contrast, spreads between corporate and government bonds continued to widen despite the announcement of a major asset repurchase programme by the ECB, which also includes an increase in corporate bond purchases.
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 are focusing on a positioning 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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