News & Insights
MARKET CONTEXT: The valuation of Equity Markets rebounded in April within a dislocated global financial market. Asset-classes sharing common underlying risks such as equity (going up) and high yield corporate bonds (going down) are moving in opposite directions. Financial assets will remain volatile until the peak of the pandemic has passed. As we are progressively getting more data on the long lasting economic effects of the virus crisis, investors can identify opportunities to put money to work at a discount in market segments where there is visibility on how and when the capital will be returned and how the cash flow generation will participate to the total return of the investments.
Global Macro: April witnessed a strong market rebound amid massive global fiscal and monetary stimuli in response to the Covid-19 pandemic and its consequences on the global economy. As a result, volatility decreased with the CBOE Volatility Index down 58.7% from a 10-year high of 82.69 on March 16 to 34.15 on April 30. Although the coronavirus pandemic continued to spread globally, daily new infection rates started to decline in a number of countries, including Italy and Spain, while the daily rate seems to have reached its peak in the US, with disparities across states. Fixed income markets rallied in April on the back of central banks’ government and corporate bond purchase programs. For the first time in its history, the Federal Reserve announced the purchase of high-yield bond ETFs and investment grade corporate bonds, in addition to its unlimited Treasury purchase plan, to inject liquidity into the markets and lower borrowing costs for US businesses. This resulted in a substantial decline in investment grade and high-yield spreads, while Treasury yields remained low. Meanwhile, new jobless claims in the US have soared to 30 million since mid-March amid coronavirus lockdowns. Oil prices remained volatile despite the unprecedented production cut announced by OPEC+. West Texas Intermediate (WTI) crude oil futures for May delivery even fell into negative territory, reflecting the weak demand and lack of storage capacity. Despite the April market rebound and historic global fiscal and monetary measures, the shape of the global economic recovery in the coming quarters remains uncertain and will largely depend on whether the Covid-19 outbreak is successfully contained in the first half of the year.
Financial Markets: Equity: Month to date the SP500 rallied +11.2%, Hang Seng +4.4%, Eurostoxx +5.1%. Fixed Income: 10 year US yields decreased -8bp in April to 0.62%. Emerging market government bonds in USD and EM local currencies rallied 2%. Corporate bonds rallied with High Yield spreads tightening 100bps and selling off during the last part of the month as equity kept rallying. Currencies: USD remained close to its highs of 2020 : EUR -0.6%, CNY +0.2%, BRL -5.1%. AUD rebounded +5.4% and safe havens JPY +0.4% and CHF -0.2%. Commodities: The global sell off of industrial commodities carried on, precious metals rebounded: Oil -6%, Gold +5.5%.
Risk Management: The long lasting fundamental economic deterioration and the technical analysis of the equity market behaviour show that the current price action characteristics correspond to a Bear market “flag”: After a fierce sell off, an undiscriminating rebound follows, ignoring economic fundamentals and the release of dramatic economic figures. The behaviour of other asset classes such as fixed income and commodities imply a severe recession around the world. At this time the equity market is only integrating news related to the easing of the virus pandemic. If there is no substantial second wave of deadly contamination, it is possible (but by no mean certain) that the market price bottom has been reached for now. However, based on evidence (fundamental, technical analysis, dislocation among asset classes), it seems probable that the equity and credit bear market will last for the months to come as financial markets progressively normalize until year end.
Opportunity: As the number of newly infected people is decreasing and equity volatility is softening, there are opportunities in market segments that integrate the unprecedented downturn of the economy such as the Investment grade financial issuers. Our analysis shows that the low valuation of investment grade financial institutions’ bonds offer an opportunity to put money to work at a discount with visibility of capital redemption and cash flow generation.
Conclusion: The market downward volatility will persist as the equity market prices do not integrate the full gravity of the lasting economic downturn. When the “pandemic's peak” is reached hopefully by July, we expect the market to start normalizing with asset prices more in line with the economic reality of the years to come. According to our systematic portfolio management process, the portfolios will stay invested in order to capture the opportunities arising as financial markets normalize.