Last week, risky asset markets remained under pressur and the volatility very high. More resilient so far, US markets overtook their European counterparts in their worst week since 2008 while corporate bonds were suffering from a lack of liquidity.
How is the situation changing?
Containment measures are in place in many countries and it should take another 1 or 2 weeks to see the first tangible results on the spread of the pandemic.
Meanwhile, governments and central banks are busy trying to support a global economy that will suffer greatly from this sudden and massive halt in activity. The ECB announced a gigantic program of bond purchases for more than 1 trillion euros in 2020 (including the greek Debt). On Monday, the Fed announced unlimited quantitative easing for corporate bonds.
On the government side, pledges of support for companies facing bankruptcy are increasing and nationalizations are even being mentioned, particularly for airlines. Brussels buries the European doctrine on budgetary rigor, the United States prepare anassistance plan of at least $ 2 trillion and direct distribution of checks to households is even mentioned … In short, the monetary and budgetary “bazookas” are out . If these measures will drastically increase the debt of governments, it will be bought by central banks and debt service will be painless thanks to low interest rates. Nevertheless, uncertainties remain, particularly concerning the United States. While some states are in confinement (California, New York State), many do not, which raises fears of a runaway epidemic, all the more disturbing that the American health system seems difficult to cope with.
Moreover, attempts to quantify the impact of the current crisis on second quarter GDP growth are yielding unprecedented results: whether it is -12% as estimated by JP Morgan or -24% according to Goldman Sachs (at an annualized rate ), it is certain that the US GDP will experience a very violent brake in the coming months. In this context, it is difficult to find many arguments that would justify a return to the appetite for short-term risk.
What scenario for the future and how do we adapt to it?
On the side of both central banks and governments, all levers are activated to pull the economy out from the coming depression; is not likely to be avoided, but its damage will be less.
Even though coordination between States is sometimes imperfect, it is now found to be emerging and the mechanisms put in place in 2008 have gone much further than before; this is to be welcomed in the name of preserving the economic system. But we are moving into a world where government debt will be much higher. In the short term, we remain convinced that it will be difficult to anticipate any lasting market rebound without improvement on the pandemic front. This could take few more weeks, with situations varying from country to country. In addition, the looming depression will necessarily have second-round effects that will help maintain significant market volatility.
Against this backdrop, we are therefore reiterating our cautious positioning, which results in low equity exposures to allocation and multi-asset funds and higher liquidity levels in many of our equity strategies.
This analysis is built on LFDE’s fund management team convictions. Completed on 23.03.2020
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