- Most countries have started to reopen their economies, as planned. No reliable evidence is really coming out yet to judge how this is proceeding in the developed economies. The flash PMI surveys published last week for May in the US and Europe look reasonably reassuring on the activity side, although not less so in Japan, but at the same time, high-frequency data collected by Google suggest that for instance in the US, even in states that ended their lockdown early, like Texas and Florida, restaurant bookings are still very weak. So the jury is still out but market is simply rejoicing that the reopening is starting to happen, even if the visibility 6-12 months out remains obviously very low, as I explained two weeks ago. The bet the market is making is that the worst is past. Therefore a large part of our tactical equity increase was targeted on this theme, with for instance high-quality players in the battered travel and leisure sectors.
- Logically, general cyclical sectors such as Industrials and financials are also benefiting from this short-term improvement in sentiment. The positioning of the market also favored these moves because, by and large, investors had so far remained very cautious despite the rebound from the march lows : most of the flows have so far gone into money market funds and US bonds, while European equity markets, and European HY corporate bonds have continued to suffer outflows. So we were encouraged to focus the majority of our “reopening plays” in Europe.
- By the same token, credit is performing strongly too, but here we had already built in this asset class a large position a month ago or so, which has done very well in the past weeks. Also it is worth keeping in mind that the Fed has now finally started buying corporate bonds as pre-announced back in march, which supports our positions further.
- Finally, the European commission basically endorsed the Franco German proposal for a recovery fund, with a 500bn euros target size, all in grants to member countries and regions most hit, plus 250 bn euros in loans without apparently very strict conditionality. This is obviously good news for European peripheral countries, in particular for Spain and Portugal. This proposal still needs the backing of all member states, including the four frugal northern members of the Union. And we do not have details yet on how the package proposed by Ursula von der Leyen would be operationalized. But what is relatively safe to say is that even if the whole project were to get delayed into the usual technocratic channels of negotiation (remember that disbursements anyway are not meant to happen before 2021), the fact that Angela Merkel signed up on a recovery fund proposal together with Macron, and this proposal is now being endorsed and enlarged in a EU proposal is definitely good news. It would be a first case of fiscal transfer and is, at minima, a signal that Germany has reached the stage when it recognizes that it is in Germany’s business interest to come to the rescue of the most fragile member countries. It is a reduction in the tail risk of Europe disintegration. Note also that next week, we should know more about the extension of the PEPP and the extra-subsidized TLTRO in favor of European banks. For these reasons, the increase in our European equity exposure has also been via the banking sector, and we have also added to our peripheral sovereign bonds, which as you’ll remember, we had reduced until we knew better if Europe would come up to the plate.
- A quick word about our views on China:
- On the economic front, China has announced a stimulus package. But even if it is good news, the package is clearly only a very modest effort. This is partly why we remain cautious and under-exposed on emerging markets, and only positioned on non-cyclical growth sectors in China.
- On the political front, it should be expected that in such a tense election year in the US, a lot of posturing, high-profile stand-off will take place between China and the US. Do we fear that this cold-war posturing might morph into a major escalation on trade or on Hong Kong risk this year? Always possible, but we still do not think so, as it is in no one’s interest really this year to take big chances with neither financial markets nor the economy. So, we do expect volatility, but we feel good about what we own in China.
- So in conclusion, no change to our strategic view, but a tactical and targeted rise in the risk profile of our funds.
Wir laden Sie gerne auch zur deutschsprachigen Web-Konferenz mit Gergely Majoros, Mitglied des Investment Committee bei Carmignac, am heutigen Freitag, 29. Mai 2020 um 15:00 Uhr ein.
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