- Economic disruption and resumption: The latest data shows the huge damage of the measures to contain the virus outbreak in the Western world: purchasing manager activity have plummeted in Europe and the US, and US jobless claims hit a high. In China, economic activity is gradually resuming, with industrial production leading consumer activity.
- Policy responses: Huge, and in some cases unlimited, monetary and fiscal packages are in place in Europe and the US to support the economy.
- Market stress: Sentiment measures are showing early signs of consolidation. Market volatility metrics have started to ease after the colossal policy measures.
- Fundamental views: Ultimately, we expect a ‘U-shaped’ recovery that will likely require ‘learning to live with the virus’ via innovations in testing and involve a gradual economic resumption. The main downside risk is prolonged and intermittent shutdowns.
- Strategy: We are now neutral US equities, favouring UK equities and commodities. We are long AUD/USD. We remain overweight eurozone and emerging market equities.
We remain attentive to a potential major breakthrough in terms of mass testing capabilities or finding and testing a vaccine. At the time of writing, we had not identified any significant breakthroughs.
Macro disruption and business resumption
The latest number are showing the economic cost of the pandemic. Surveys of economic sentiment have plunged in Europe and the US. In Europe, the services purchasing managers index fell to its lowest since records began. The manufacturing index was hit hard. In the US, the pattern was similar.
US initial jobless claims soared its highest on record, highlighting the very sudden shutdown of many businesses.
There appears to be light at the end of the tunnel in Asia. In China, for example, economic activity is gradually resuming, though to varying degrees across sectors. In sectors equivalent to 65% of GDP, activity is back to 86% of normal levels. The ‘new normal’ of around 90% is expected in early April.
Policy responses have been of unprecedented magnitudes. The US Federal Reserve announced ‘unlimited’ quantitative easing and the ECB set a EUR 750 billion emergency bond purchase programme. The Fed is now back in deep easing territory with policy rates effectively at zero and a massive QE programme that aims at keeping monetary conditions loose for the foreseeable future.
On the fiscal front, the US approved a USD 2 trillion package, equivalent to about 10% of GDP (see exhibit 1). Large fiscal easing programmes are also in place in Europe. China has eased fiscal policy to the tune of USD 344 billion. But its effort as a percentage of GDP is more contained and more targeted. This reflects the authorities; concerns about excessive leverage. The measures aim to help SMEs, vulnerable populations and regions and support infrastructure projects such as smart cities.
Exhibit 1: Fiscal packages compared: US measures well exceed China's more targeted efforts - graph shows the value of national packages of measures as a percentage of GDP
Source: Bloomberg and BNPP AM, as of 27/03/2020
Sentiment and systemic market stresses
Sentiment has recently shown tentative signs of consolidation. There has been a slight drop in the number of Bloomberg ‘virus’ news stories.
Indicators of systemic stress have not become unhinged, partly due to the aggressive liquidity measures by global central banks.
Finally, volatility has started to ease, also supported by the massive policy measures in major economies.
Recent changes to our positioning
We expect the combination of unlimited Fed QE and the trillion dollar fiscal package to support the market. It will not necessarily mark the bottom of the cycle for US equities as the coronavirus hits the US, raising concerns about the economic outlook. In addition, valuations, while below historical averages, have not adjusted by as much as those of other risky assets such as UK equities.
We have more conviction on UK equities and cyclical commodities. After the recent violent price action, commodities are at levels not seen since the 1970s. Note that commodities usually outperform in early stages of a recovery and commodity assets would be supported in reflationary scenarios.
In light of this, we trimmed our US equity view to neutral, favouring UK equites, global commodities (excluding agricultural commodities), and a long AUD/USD trade.
This is an extract from our 30 March Asset Allocation Flash note entitled Opportunities in the crisis
Views expressed are those of the Investment Committee of MAQS, as of end-March 2020. Individual portfolio management teams outside of MAQS may hold different views and may make different investment decisions for different clients.
The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.
Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions).
Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.