Contagion speed is key for markets to reach turning point

Monday 30 March 2020

Global Investment Views, Fixed income, Equity

Download the Complete April Global Investment Views

Contributing Authors

Pascal Blanqué
Group Chief Investment Officer,
Amundi

Vincent Mortier
    Deputy Group CIO, 
Amundi

Markets (financial cycle) are leading the economic cycle and will bottom out before the end of the coronavirus pandemic. However, they would stabilize once reassured on three points:

  1. The cyclical pattern of the pandemic, or when there is some sign of an improvement on the speed of the contagion. This depends on the ‘time’ variable (extension of the crisis period) and on the mobilization efforts (containment measures introduced in different countries). There is still a lot of uncertainty at this point.
  2. The ‘whatever is necessary’ tactics of the fiscal and monetary authorities, and whether these policies are considered credible when it comes to easing financial conditions for the corporate sector or providing adequate resources to households so the latter can endure a period of higher unemployment resulting from an economic shutdown. Markets seem to have finally understood how big and unprecedented these efforts are.
  3. The short end of the credit curve, after recent dislocations, and core bond yields, which rose since the fiscal measures were announced, discounting higher future debt. Bond yields now appear to be under control, while on the credit side there is still room for improvement.

However, the policy bazookas won’t be effective unless there is a corresponding fall in the speed of Covid-19 contagion. The combination of the two will drive the timing of the recovery and, as long as the pandemic does not seem to be under control, volatility will persist. What matters most to investors, in our view, is the speed of the pandemic’s direction that is still pointing towards a rise in the number of cases, with an acceleration in recent weeks. When containment measures start to produce results, the speed of contagion should decelerate. This happened in China first, and we now see some signs of it in Italy. Most countries are still some way from their peak. The UK and the US are still in an acceleration phase, as are many EU countries, while some EM countries are at an early stage.

If the global lockdown proves successful, the pandemic should accelerate toward its peak in the next month, after which the speed of the increase in new cases should start to decline. We are moving in this direction, but we are not there yet. In the short term, we can only expect temporary relief from the extreme market dislocation rather than a full and stable recovery.

In this transitional phase, as the crisis unfolds, it will become clear to investors that the day after the pandemic ends they will find themselves with lower core bond yields and thus a need to find yield elsewhere. Credit markets and EM debt will be the natural candidates in the public markets, though pressure on these assets remains high at present and it’s not yet time to call aggressive entry points. In credit, we remain cautious and highly selective in high yield, while we prefer the IG space which should benefit from central banks’ umbrellas, as will peripheral bonds. A continuation of the downward loop in the market could only be justified by a permanent shock to potential growth, but this is not the most likely scenario right now.

Equity markets will remain under pressure until signs of stabilization in the curve of the epidemic’s evolution materialize. We see opportunities arising in quality cyclical sectors that could bounce back strongly once the appeal of cyclicals is restored, as we approach the peak of the pandemic. Some bottoming out could begin earlier at regional level and China is a good candidate for that. In terms of portfolio management, this backdrop calls for a continued-cautious approach, as we recognize that global risk aversion will persist in the short term, and will legitimately drive a flight to safety into a combination of high-quality, defensive and liquid assets. Active management and selection will be key to managing this ‘in-between phase’ and, in particular, the trade-off between performance and liquidity. Now, more than ever, robust liquidity management will make a difference.

Fixed Income: Prioritize liquidity amid outbreak and default risks

Contributing Authors

Eric Brard
Head of Fixed Income, Amundi

Yerlan Syzdykov
    Head of Emerging Markets, 
Amundi

Ken Taubes
    Chief Investment Officer, US, 
Amundi Pioneer

Central banks unleashed their “bazookas” and governments also responded amid global recessionary fears. Market reaction following the spread of the Covid-19 worldwide was extreme, pushing first core government bond yields at an alltime low, and then triggering a rebound once markets started to price in higher debt as a result of huge fiscal stimulus. Spread products have been under severe pressure across the board, discounting a global recession, rating downgrades and higher default in HY space. The focus on resilient business models that can survive the economic downturn is critical to preserve assets from permanent impairment. Volatility is extremely high, and liquidity management with cash and similar assets is a top priority. Finally, it’s crucial to position portfolios to build capacity to recover when markets improve.

DM bonds

In global fixed income, we have a positive duration bias, with a constructive view on US (safe-haven flows), close to neutral in core euro and negative in Japan. We adjusted our duration view elsewhere, becoming more constructive on Australia and neutral on UK and Canada. We are less constructive on inflation bonds in the US (falling energy prices) and Europe. EU peripheral bonds continue to offer attractive yields and we remain constructive (ECB’s massive liquidity injection), although a bit less than in the past in Italy and Spain. We still expect high volatility on peripherals and liquidity shortages. We are positive on credit but have reviewed our sector views: less constructive on cyclicals and sectors (shipping, autos) that are directly exposed to this crisis. Quality of issuers is also important especially in the riskier segments. We are constructive on IG, but we have increased the focus on liquidity. We prefer EUR over US in IG (strong fundamentals and support from QE) as well as in HY (avoiding US energy). Overall, we would need to see some evidence of a bottom before adding risk. In the US, tightening financial conditions still weigh on market liquidity. However, over past few days, we have seen that the dramatic drop in inflation expectations has been recovered, particularly in the TIPS market. This is also confirmed in the yield curve which has steepened quite steadily. Together, both suggest that actions from CBs and fiscal stimulus is starting to catch-up and may even be getting some control of the situation. We remain cautious and selective, and continue to focus on liquidity. We also look for long-term high quality US corporate credit at deep discount.  

EM bonds

We are cautious in short term due to the current crisis. Some EMs are at an early stage of the virus outbreak and others may see a second wave, which will affect the domestic-consumption story. With appropriate selection country by country, EM bonds offer value in the medium term. However, investors will remain cautious before exploring entry points during this phase. On HC, Indonesia, Ukraine and South Africa are attractive, but we are less positive on oil-exporting countries. In LC, we prefer higher-yielding countries where local real rates are at multi-year highs (Serbia, Egypt, Ukraine).

FX

We are positive on USD and cautious on EUR, and on most of commodity currencies. US assets are some of the most liquid in the world and are popular in a crisis. In EM FX, we are still cautious.

Equity: Cautious times call for attention to fundamentals 

Contributing Authors

Kasper Elmgreen
Head of Equities, Amundi

Yerlan Syzdykov
    Head of Emerging Markets, 
Amundi

Ken Taubes
    Chief Investment Officer, US, 
Amundi Pioneer

Equities have witnessed the fastest correction ever, with S&P 500 falling into bear market in just 17 trading sessions. Markets moved sharply from pricing an economic reacceleration earlier to a profit recession now. However, a deep and long lasting profit recession is still not priced in, but if it happens, (not our central scenario) would lead to a further deterioration in prices. On the other hand, as markets struggle to digest new data and assess the potential impact of the huge policy support measures, volatility and behavioural biases will remain very high. Thus, investors should balance risks and prioritize liquidity. At the same time, focus should be on identifying sectors/stocks with strong balance sheets, resilient business models that will not be disrupted by the crisis (or may even emerge stronger from it) and are trading at a deep discount.

DM equities

In Europe, weak players in weak industries such as national incumbents in the auto and airlines sectors look very vulnerable, and some are likely to require debt guarantees, equity issuance and potentially nationalisation in a matter of months. Dislocations are emerging as a result of the selloff. We remain constructive on companies with resilient business models and strong balance sheets, and certain structural winners (in consumer staples and health care) within these parameters are now attractively priced. We are also keeping an eye on developments in the technology sector, which was previously viewed as too expensive. Separately, there are idiosyncratic opportunities in value, which has never been so cheap relative to growth in Europe. In this space, we are particularly positive on consumer discretionary and financials owing to attractive valuations.

In the US, the recent sell-off shows that fear factor is dominating the markets at a time when recession in international markets seems priced in but not in the US (more to go). Policymakers have shown a full desire to provide complete fiscal and monetary support. But given that it is a healthcare crisis first, market sentiment will improve if we see fewer coronavirus cases. Equity risk premiums are attractive but negative real rates may undermine the strength of this signal. From a style perspective, value stocks under-performed growth since the financial crisis ended and the story was similar in the current market correction. Nonetheless, we could see a rebound in value once economic growth bottoms-out; we remain positive towards cyclical/value names and we believe investors should avoid the energy sector (falling oil prices and severe disruptions).

Overall, we believe current market dislocations could provide selective long-term opportunities.

EM equities

We are cautious in EMs (vulnerability to the economic impact and uncertain commodity markets) overall and very defensive on countries and sectors driven by services and tourism as it will take them longer to recover. Likewise, we are defensive on energy sector as the supply-demand balance looks increasingly unfavorable. At this stage, we favor China and Korea – in particular consumer discretionary companies – as they are approaching a recovery phase regarding coronavirus. After uncertainty recedes, there will be pockets of opportunities, thanks to policy support and compelling valuations.

Important Information

The MSCI information may only be used for your internal use, may not be reproduced or disseminated in any form and may not be used as a basis for or a component of any financial instruments or products or indices. None of the MSCI information is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such. Historical data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. The MSCI information is provided on an “as is” basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating any MSCI information (collectively, the “MSCI Parties”) expressly disclaims all warranties (including, without limitation, any warranty of originality, accuracy, completeness, timeliness, noninfringement, merchantability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages. (www.mscibarra.com). The Global Industry Classification Standard (GICS) SM was developed by and is the exclusive property and a service mark of Standard & Poor's and MSCI. Neither Standard & Poor's, MSCI nor any other party involved in making or compiling any GICS classifications makes any express or implied warranties or representations with respect to such standard or classification (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of such standard or classification. Without limiting any of the forgoing, in no event shall Standard & Poor's, MSCI, any of their affiliates or any third party involved in making or compiling any GICS classification have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages

Unless otherwise stated, all information contained in this document is from Amundi Pioneer Asset Management (“Amundi Pioneer”) and is as of March 30, 2020.

The views expressed regarding market and economic trends are those of the authors and not necessarily Amundi Pioneer, and are subject to change at any time. These views should not be relied upon as investment advice, as securities recommendations, or as an indication of trading on behalf of any Amundi Pioneer product. There is no guarantee that market forecasts discussed will be realized or that these trends will continue. These views are subject to change at any time based on market and other conditions and there can be no assurances that countries, markets or sectors will perform as expected. Investments involve certain risks, including political and currency risks. Investment return and principal value may go down as well as up and could result in the loss of all capital invested.
This material does not constitute an offer to buy or a solicitation to sell any units of any investment fund or any service. Diversification does not guarantee a profit or protect against a loss.

Date of First Use: March 30, 2020.

Before investing, consider the product's investment objectives, risks, charges and expenses. Contact your advisor or Amundi Pioneer for a prospectus or summary prospectus containing this information. Read it carefully. To obtain a free prospectus or summary prospectus and for information on any Pioneer fund, please download it from our  literature section.

Securities offered through Amundi Pioneer Distributor, Inc., 
60 State Street, Boston, MA. 02109. 
Underwriter of Pioneer mutual funds, Member  SIPC.  

Not FDIC insured | May lose value | No bank guarantee