Market Compass July 2020 A team of 13 analysts based in Paris, Cologne, Trieste, Milan and Prague runs qualitative and quantitative analysis on macroeconomic and financial issues. The team translates macro and quant views into investment ideas that feed into the invest- ment process. MARKET OUTLOOK US COVID cases are on the rise in several large states... …increasing the risk of a stop in the reopening of the economy Business and consumer surveys point to increase optimism The Fed is discussing new support measures Q2 to show unprecedented contraction… …but overall sentiment improvement Monetary and fiscal policy supportive Exit from lockdown continues PMIs continued to improve PBoC eased moneatry policy again slightly Infrastructure investment accelerated Private demand is lagging behind Tankan report shows large sentiment drop June manufacturing PMI improved only slightly Second supplementary budget larger than expected BoJ to absorb additional bond issuance EUROZONE JAPAN • Hopes for a quick V-shaped recovery are fading fast. • The resurgence of COVID cases in the US and their steady increase in several Emerging Markets (EMs) underline the downside risks to growth. • Markets still discount a rosy scenario and this increases the risk of a sharp correction. Central banks remain supportive, though. • Prudent overweight (OW) in Equities while reducing overweight in High Yield (HY) Credit. Keep a sizeable OW in Investment Grade (IG) credit. Edited by MACRO & MARKET RESEARCH TEAM www.generali-investments.com CHINA UK BoE stepped up QE... ...but signaled less additional support ahead Manufacturing PMI surprised on the upside Brexit negotiations stuck WORLD Oil rebounded to 40$ per barrel ...but it’s still 20$ below the pre-crisis level
Transcript
Market CompassJuly 2020
A team of 13 analysts based in Paris, Cologne, Trieste, Milan and Prague runs qualitative and quantitative analysis on macroeconomic and financial issues.
The team translates macro and quant views into investment ideas that feed into the invest-ment process.
MARKET OUTLOOK
USCOVID cases are on the rise in several large states...
…increasing the risk of a stop in the reopening of the economy
Business and consumer surveys point to increase optimism
The Fed is discussing new support measures
Q2 to show unprecedented contraction……but overall sentiment improvementMonetary and fiscal policy supportiveExit from lockdown continues
PMIs continued to improve
PBoC eased moneatry policy again slightly
Infrastructure investment accelerated
Private demand is lagging behind
Tankan report shows large sentiment drop
June manufacturing PMI improved only slightly
Second supplementary budget larger than expected
BoJ to absorb additional bond issuance
EUROZONE JAPAN
• Hopes for a quick V-shaped recovery are fading fast.• The resurgence of COVID cases in the US and their steady increase
in several Emerging Markets (EMs) underline the downside risksto growth.
• Markets still discount a rosy scenario and this increases the risk ofa sharp correction. Central banks remain supportive, though.
• Prudent overweight (OW) in Equities while reducing overweightin High Yield (HY) Credit. Keep a sizeable OW in Investment Grade(IG) credit.
Edited by
MACRO & MARKETRESEARCH TEAM
www.generali-investments.com
CHINA
UKBoE stepped up QE...
...but signaled less additional support ahead
Manufacturing PMI surprised on the upside
Brexit negotiations stuck
WORLD Oil rebounded to 40$ per barrel
...but it’s still 20$ below the pre-crisis level
New wave of contagion, leading to another halt in activities
Internal disagreements lead to an underwhelming EU fiscal response
US-China tensions increase
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DIRECTION OF TRAVEL
• Prudent overweight in Equity, with balanced US, EuroArea exposure, positive tilt to EMs
• Overall underweight in sovereigns• IG are still preferred to HY, from a default adjusted yield
perspective• Neutral allocation among Financials and non Financials,
as central banks support the credit sector• Reduce the underweight in cash
Equi
ties
Bond
s
• Improving financial conditions, a bottoming cycle and dovish Fed’s stance keep PEs high. We expecta big swing in earnings growth in 2021 and seemid-single-digit total returns in 1 year.
• After the rally, we recommend a lower OWposition and a balanced portfolio (US alignedwith EMU) with a positive tilt to EMs.
• Core yields trapped in a range. Optimism onan economic rebound and the normalizationof inflation expectations might trigger a slightincrease.
• Upcoming EU Recovery Fund and generous ECBliquidity support carry trades - slight tighteningof EA non-core spreads.
• Further USD weakness ahead, though onlygradually so...
• …as global USD funding strains ease and global economic data rebound from the deep trough.
• Undervalued JPY to benefit from low US yields and lower portfolio outflows from Japan.
Risk Min. Risk Max.
Curr
enci
es
Cash
Equities
Euro Area
US
Gov. Euro Area (core)
Gov. Euro Area (peripheral)
Euro Investment Grade
Euro vs. USD
UK
China
Dur
atio
n
Sovereign
Gov. US
JPY vs. USD
Euro High Yield
TOPICS TO WATCH!
Duration
Financial markets reprice sharply down the growth expectations
• Neutral duration recommended.
Japan
Credit
Emerging Markets
This document is based on information and opinions which Generali Insurance Asset Management S.p.A. Società di gestione del risparmio considers as reliable. However, no representation or warranty, expressed or implied, is made that such information or opinions are accurate or complete. Generali Investments Partners S.p.A. Società di gestione del risparmio, distributor of this document, periodically updating the contents of this document, relieves itself from any responsibility concerning mistakes or omissions and shall not be considered responsible in case of possible changes or losses related to the improper use of the information herein provided. Opinions expressed in this document represent only the judgment of Generali Insurance Asset Management S.p.A. Società di gestione del risparmio and may be subject to any change without notification. They do not constitute an evaluation of any strategy or any investment in financial instruments. This document does not constitute an offer, solicitation or recommendation to buy or to sell financial instruments. Generali Investments Partners S.p.A. Società di gestione del risparmio and Generali Insurance Asset Management S.p.A. Società di gestione del risparmio are not liable for any investment decision based on this document. Generali Investments may have taken, and may in the future take, investment decisions for the portfolios it manages which are contrary to the views expressed herein. Any reproduction, total or partial, of this document is prohibited without prior consent of Generali Investments Partners S.p.A. Società di gestione del risparmio. Generali Investments is part of the Generali Group which was established in 1831 in Trieste as Assicurazioni Generali Austro-Italiche. Generali Investments is a commercial brand of Generali Investments Partners S.p.A. Società di gestione del risparmio, Generali Insurance Asset Management S.p.A. Società di gestione del risparmio, Generali Investments Luxembourg S.A. and Generali Investments Holding S.p.A.
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SPECIAL FOCUS
The May data show that, once the lockdown is eased, economic activity snaps back quickly. However, the return to the pre-crisis level will be slow. We expect world GDP to contract by 5% this year and, in most countries, production will not be back to the 2019 level before 2022. Additionally, deep scares will remain, as entire sectors of the economy (for example retail and transportation) will likely undergo a deep and possibly painful restructuring. High government debt, adding to the already substantial corporate one, will be another legacy. And we are not even sure that the pandemic is behind us; while contagion seems to be under control in Europe, new cases are spiking in the US (even though mortality rate is trending down) and large emerging economies like Brazil. Yet looking at financial markets, none of this seems a big concern. The S&P 500, after plunging to 30% below its beginning of February level, is now only 5% lower. HY spreads have shrunk quickly
THE DEFAULT-ADJUSTED YIELDThe default-adjusted yield is the calculation of the expected bond return adjusted to the default risk. It is used to calculate the yield of bonds with different levels of default risk.
GLOSSARY
Source: Datastream, as of 02.07.2020
despite the high likelihood of a default wave. There are at least two explanations to this apparent disconnect. Firstly, the market may be still expecting a V-shaped recovery where output is quickly back to normal. Additionally, the unprecedented central banks support has flooded markets with liquidity and suppressed the yields on safer assets. Therefore investors turn to equity and HY as there is nowhere else to go (TINA, There is No Alternative) and they feel reassured by the central banks’ backstop. Secondly, investors, while aware of the risk, may also be vary of turning away too early from risk assets as they, by doing so, may miss any further appreciation (FOMO, Fear Of Missing Out). The disconnect between valuations and fundamentals increases the risk of a sharp downward correction of the former. Yet we think that TINA and FOMO will still provide some support to the riskiest segments of the market during the summer, with more threats emerging in the autumn. Therefore, in the short run, we keep a prudent OW in equities but reduce the OW in HY credit.
US: COVID evolution and the stockmarketTINA and FOMO support risk assets, for now
