Opportunities in the crisis
Monitoring the virus & its implications
- Tracking the virus: Europe feels the full hit of the virus, but there are tentative signs of decelerating growth rates, especially in Italy. The US is now in the eye of the storm as new cases soar. In China and South Korea new cases remain low.
- Economic disruption and resumption: Latest data are showing the huge damage of the virus in the Western world. PMIs plummeted in Europe and the US. In the latter, initial jobless claims hit record highs. In China, economic activity is gradually resuming, with industrial production leading consumer activity.
- Policy responses: Huge monetary and fiscal packages in place in Europe and the US. The Fed announced ‘unlimited’ QE and the ECB announced a further EUR750bn QE programme. On the fiscal front, the US approved a USD2tn package and large programmes are also in place in Europe, but jointly-guaranteed debt remain elusive. China has so far committed USD344bn in measures.
- Sentiment and systemic market stresses: Sentiment measures showing early signs of consolidation. Indicators of systemic stress rose, but did not unhinge. Market volatility metrics starting to ease following colossal policy measures.
Key views & asset allocation
- Fundamental views: Ultimately we expect a U-shaped recovery that will likely require ‘learning to live with the virus’ via innovations in testing and gradual economic resumption. The main downside risk is prolonged and intermittent shutdowns that prolong a global recession. Near term, the coronavirus is hitting the US with full force so Fed and fiscal efforts do not necessarily mark the bottom in stocks.
- Strategy: Valuations in US equities haven’t adjusted as much as for other risky assets such as UK equities and commodities. We have more conviction on the latter two, also noting that commodity assets usually outperform after recessions are priced and should be supported in reflationary scenarios.
- Asset allocation changes: We cut our US equity conviction to neutral and replaced this with UK equites, global commodities and long AUD/USD. We also remain overweight EMU and EM equities. On rates, based on fundamental and market dynamics, we see higher yields, and remain underweight in EMU bonds.