MARKET UPDATE : SPEAK TO OUR INVESTMENT TEAM

Adrien Pichoud, Chief Economist, commented on the markets

Fabrice Gorin, Portfolio Manager, provided with an update on the fixed income portfolios

Said Tazi, Portfolio Manager, ended with an update on equities.

• The shock to the global economy has been unprecedented and will cause a deep economic contraction during the first half of the year.  We do however expect that global economic activity will gradually resume by the end of the spring, slowly reaccelerate throughout the second half of the year and extend into 2021. Gradual easing of social distancing measures in developed countries and economic policies should  help support this positive trend.
   
• The response of governments around the world has been massive and will likely continue. Another encouraging sign for us is that governments are now increasingly focusing  on exit strategies to the lock-downs in order to progressively reactivate the global economy. On the monetary side, the FED, the ECB and most major central banks have announced unprecedented measures to support liquidity and credit in financial markets, resulting in USD 3.3. trillion being injected since mid-February (representing a 25% increase in global liquidity).

We can now assume that the financial markets have integrated two factors:

• Fears of a financial system meltdown have been eased thanks to the huge amounts of liquidity injected by central banks in recent  weeks.
   
• The sharp downward revision in earning expectations has been balanced by central banks’ actions. Having cash rates and long term government rates now at zero or even negative across all developed economies means that the attractiveness of equities increases in relative terms.

• The Japanification of the Western World with lower growth for longer which we have been speaking about since last year prompted many investors to progressively reduce their exposure to money market and government bonds to purchase riskier fixed income assets such as High Yield and Emerging Markets bonds at the start of the year. The pandemic and subsequent impact on markets led investors to massively  sell assets in order to raise cash. We saw huge outflows in both investment grade and high yield bonds in March. Central banks intervened to avoid a stop on credit market.  
   
• Investment Grade credits have become more attractive since the March sell-off and we believe it is worth considering increasing the allocation to this asset class.
   
• We remain cautious on High Yield, despite attractive valuation. The risk-adjusted return is better for Investment Grade than for High Yield.
   
• The outlook for EM bonds remains quite uncertain. We are very discerning in terms of the quality of the companies and countries we select, and favor hard currencies over local currencies.

• What we witnessed across stock markets in Q1 was dramatic in terms of speed and severity. The shut down was compounded by the oil war between Saudi Arabia and Russia.
   
• Not all stocks were hit the same, there was a significant disparity between sectors. Energy for example was down -50% whereas defensive sectors, such as health care and consumer staples, were down less than 30%.
   
• Since the March sell-off, US stocks recovered 50% of their losses. They are still down -10% compared to start of the year. European and Emerging Market stocks on the other hand are still down by almost -20%.
   
• The Bull Case: Optimists believe that the unprecedented responses from governments and central banks will offer a backstop to markets. They also believe that China is a good proxy for what is to come in Europe and the U.S., once the spread of the virus slows down and would argue that it is far more attractive to invest in equities than bonds.
   
• The Bear Case: Pessimists believe that markets are being too complacent and that the expected drop in GDP will result in the greatest economic downturn since the Great Depression. Under the pessimistic scenario, we are witnessing a bear market rally, driven by short covering and FOMO.  
   
• At the beginning of year, the consensus was to prefer cheaper valued companies and European shares, the expectation being that both the value of these companies and European stocks would recover their lost ground. We have chosen to take a different approach:
  • In recent years, we have focused on high-quality companies with high-margins and strong balance sheets. As a result, we have moved towards an overweight in Technology and the U.S. market.
  • We have seen positive results in this approach though a second leg down cannot be excluded. It is now more important than ever to choose equities that will survive an extended period of economic slowdown, not just because they are cheap.
  • We recommend investing in those companies that are better placed to survive disruption and thrive once the “smoke clears”.  The digitalization of society, which was already taking place before Covid-19, is taking a leap forward. Amazon for example was already increasing its market share before the crisis and is now benefiting disproportionally from the lock-downs.
  • There are also opportunities in the hardest hit sectors, like Travel, Entertainment and Luxury. Companies in these sectors will take longer to recover but there are interesting investments that offer value.
  • Our core equities product outperformed its peers by 7% last year in a rising market. This year, in a down market, it has again outperformed them by 7%.

In conclusion, we believe that the global economy will recover but we acknowledge that it will take time and may be more challenging than previously hoped. However, given the scale of the governments’ support, interest rate cuts by central banks and liquidity injections all having a significant  impact on asset class valuations, we have started to bring portfolios closer to a neutral positioning in terms of risk allocation, by increasing equity and Investment Grade bond allocation from March the 27th.