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Baloise Market View
Current economic and financial market outlook
Monitoring COVID-19
Easing in Europe, while case numbers in South America are surging
Baloise Market View, 29 May 2020 2
5-day average of new coronavirus cases
per 100'000 inhabitants
Global coronavirus case numbers
0
2
4
6
8
10
12
14
16
18
20
Jan Feb Mär Apr Mai
United States
Brazil
Russia
United Kingdom
Spain
Italy
France
Germany
Turkey
India
0
500'000
1'000'000
1'500'000
2'000'000
2'500'000
3'000'000
3'500'000
4'000'000
4'500'000
5'000'000
5'500'000
6'000'000
Jan Feb Mär Apr Mai
United States
Brazil
Russia
United Kingdom
Spain
Italy
France
Germany
Turkey
India
Rest of the World
Sources: Baloise Asset Management, Bloomberg Finance L.P.
-80%
-70%
-60%
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
as per 28.05.2020
2020 High
2020 Low
Yield (YTD)
Financial market development since the beginning of the year
Recovery in many market segments
Baloise Market View, 29 May 2020 3
BondsShares FX Alternative & Raw materials
Source: Baloise Asset Management, Bloomberg Finance L.P.
in local currency
Macroeconomic environment: Summary
Mobility data points to a recovery
Baloise Market View, 29 May 2020 4
› Governments are easing lockdowns and mobility data signals a recovery
(see graph on the left).
› In our baseline scenario (p.7), we assume that the global recession will
bottom out in the second quarter. Thanks to the massive economic policy
stimulus, we expect a gradual recovery in the second half of the year.
Economy
› The US policy rate is in a target range of 0.00-0.25%. The quantitative
easing program (QE) is unlimited in terms of volume and now also
include corporate bonds.
› The European Central Bank (ECB) improved the conditions for long-term
bank loans (TLTRO). The QE volume, specifically for cushioning the
pandemic, remains at EUR 750 billion for the time being.
› The Swiss National Bank (SNB) raised the negative interest rate
exemption threshold for banks. It also introduced a new refinancing facility
to provide additional liquidity to the banking system
› We are currently observing strongly deflationary trends, which are likely to
continue in the coming months.
› In the USA, inflation (excluding energy and food prices) is 1.0%. Core
inflation in the euro zone is currently 0.9% and in Switzerland only a
meager -0.5%.
Inflation
Monetary policy
Mobility data: Retail and recreation locations
Sources: Google, Baloise Asset Management as of 28.05.2020
-100
-80
-60
-40
-20
0
20.05.2020 14.05.2020 Max. Decline
% change since the beginning of the year*
*Average from 3 January - 6 February 2020
10
20
30
40
50
60
70
UK
Total Manufacturing industry Services
Macroeconomic environment: purchasing manager indices
Signs of recovery but prospects for the 2nd quarter remain bleak
Baloise Market View, 29 May 2020 5
10
20
30
40
50
60
70
05-17 05-18 05-19 05-20
Euro area
10
20
30
40
50
60
70
05-17 05-18 05-19 05-20
USA
Sources: Baloise Asset Management, Bloomberg Finance L.P. as at 22.05.2020
10
20
30
40
50
60
70
05-17 05-18 05-19 05-20
Germany
10
20
30
40
50
60
70
05-17 05-18 05-19 05-20
China
Macroeconomic environment: monetary policy
Fed balance sheet climbs to over USD 7 trillion (33% of US GDP)
Baloise Market View, 29 May 2020 6
0
1
2
3
4
5
6
7
8
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Sources: Baloise Asset Management, Bloomberg Finance L.P.
Since COVID-19 outbreak:
+ USD 2.9 trn
(14% of US GDP)
Global Financial
Crisis:
USD 1.2 trn
Federal Reserve Balance Sheet USD trillions
Macroeconomic environment: Fiscal policy
A 750 billion euro aid package for the next generation of the EU
Baloise Market View, 29 May 2020 7
› The EU Commission has proposed a massive economic
stimulus package to cushion the economic consequences
of the coronavirus crisis.
› The EU's reconstruction plan is worth €750 billion, of which
€500 billion is in the form of grants to member states and
€250 billion in loans.
› This is to be financed by debts on behalf of the EU, which
must be paid off via the EU budget by 2058
› Weeks of negotiations are to be expected, as the 27 EU
states must unanimously agree to the overall package in
order to implement it.82
77
32
91
63
32
0 50 100 150 200
Italy
Spain
Greece
Grants Loans
Planned support under the EU reconstruction planbillion EUR
Sources: Bloomberg News, Baloise Asset Management as of 28.05.2020
Economic and financial market outlookOur current scenarios for 2020
Baloise Market View, 29 May 2020 8
DownsideBasic scenario
Ec
on
om
yF
ina
nc
ial
Ma
rke
ts
75% Upside
› U-shape: Global recession in the first half
of the year, followed by the beginning of a
gradual recovery in the second half
› W-shape: Short recovery followed by
another growth decline as the virus
spreads uncontrolled again (2nd lockdown)
› V-shape: Global recession in the first half
of the year with strong recovery in Q3 and
Q4
› Interest rates trade sideways
› Credit spreads stabilise
› Short-term volatile stock market
development (+/- 10% from current levels)
› Interest rates reach new lows
› Sharp rise in credit spreads
› Sell-off on the stock markets (losses
>30% from current levels)
› Slight increase in long-term interest rates
› Gradual narrowing of credit spreads
› Equity markets recover significantly
thanks to generous liquidity situation
Assu
mp
tio
ns
› Fed: Key rate at 0-0.25% + QE
› ECB: TLTRO + extension QE until 2021
› SNB: Continuous FX interventions
Mo
neta
ry
po
lic
y › Fed: QE expansion, primarily in corporate
bonds
› ECB: -10bp + QE / adjustment Capital key
› SNB: -25bp + high FX interventions
› Fed: 0-0.25% + QE is throttled from Q4
› ECB: TLTRO + QE only until the end of
2020
› SNB: Only gradual FX interventions
› Global pandemic remains under control
thanks to lockdown measures
› Steady but prudent lifting of the lockdown
keeps the reproduction numbers R(t) below
or close to 1 and further waves remain
manageable (locally limited)
› R(t) rises well above 1, leading to a
second more severe pandemic wave
› Complete lockdown must be reintroduced
in many places
› Massive payment defaults in the oil sector
with spill-over effects on other sectors
15% 10%
› Rapid containment of the pandemic thanks
to "social distancing
› Faster than expected lifting of the
lockdown without effect on R(t)
› Potential "game changer" on the treatment
side (tests or vaccine)
Risk overview
Main risks in the coming 12 months
Baloise Market View, 29 May 2020 9
Europe
› Uncontrolled coronavirus pandemic leads to a massive slump in
growth and a burden on the budgets of already highly indebted
countries downgrade from Italy to HY
China
› Global slump in demand leads to a significant and
sustained slowdown in growth
› Rising credit defaults due to the high indebtedness of
state-affiliated companies
Global
› Another massive increase in global COVID-19 case numbers after
initial easing measures
› Escalation of the trade dispute between the USA and China
USA
› Slump in consumption due to rapidly rising
unemployment caused by the coronavirus
› Persistently low oil price leads to a massive increase in
default rates in the US energy market
› Volatility in the face of US presidential elections
Baloise Market View: At a glance
Positioning against benchmark
Baloise Market View, 29 May 2020 10
› Equities: Equity markets have become decoupled from the gloomy economic data and
are currently pricing in a V-shaped recovery. We therefore see a potential for
disappointment in the short term and prefer a defensive positioning. In our baseline
scenario, we currently assume that the lockdown will be further relaxed and that the
massive economic policy stimulus will cushion the economic downturn. We therefore
regard equities as attractive over twelve months, whereby we prefer more defensive
sectors. However, we are constantly monitoring the course of the coronavirus cases
and high-frequency economic indicators and would also rebuild our equity holdings
more quickly if any medical advances were to be made or if an economic turnaround
were to become apparent.
› Bonds: We expect a long term low interest rate environment both in the short term and
over 12 months, which is why we underweight bonds overall. Spreads on investment-
grade corporate bonds have narrowed, but still seem attractive to us, also in view of the
default risks (see here). We therefore overweight corporate bonds in the medium term,
but are cautious with regard to credit selection, as the crisis is likely to result in further
rating downgrades and higher default rates. Government bonds are unattractive against
the background of our current baseline scenario.
› Alternative investments: The alternative investment segment offers attractive sources
of return with relatively stable income, such as real estate. But here too, selectivity is
key. Current valuation of real estate funds, for example, leaves little room for further
advances, but the spread between the individual funds is very high.
› Cash: In view of the volatile market environment, an increased liquidity ratio is indicated
in the short term despite negative interest rates. In the medium term, this should be
reduced back to neutral by shifting into higher-yielding asset classes.
Attractive Attractive
● ●
● ●
● ●
● ●
● ●
● ●
● ●
● ●
Sources: Baloise Asset Management per 28.05.2020
Senior Secured Loans
Cash
Fixed Income
Corporate Bonds
Government Bonds
Alternatives
Real Estate
3-6 Months 12 Months
Unattractive Unattractive
Equity
Baloise Market View: In detail
Positioning against benchmark
Baloise Market View, 29 May 2020 11
● ●CHF ● ●EUR ● ●USD ● ●
EmMa (USD) ● ●● ●
CHF ● ●EUR ● ●USD ● ●
Government Bonds CHF ● ●EUR ● ●USD ● ●
● ●Real Estate Funds (CHF) ● ●
Equity (CHF) ● ●Senior Secured Loans USD ● ●
Cash CHF ● ●Current view ●; previous month ◌
Sources: Baloise Asset Management per 28.05.2020
More
attractive
3-6 Months 12 Months
Less
attractive
Less
attractive
Corporate Bonds
Alternative
Investments
Fixed Income
Equity
More
attractive
Baloise Asset Management
Aeschengraben 21
CH-4002 Basel
www.baloise-asset-management.com
Disclaimer:Baloise Asset Management AG accepts no responsibility for the key figures and performance data used. The content of the publication contains opinions on
market developments and is intended solely for information purposes and is not intended to provide investment advice. In particular, the information in no way
constitutes an offer to buy, an investment recommendation or a decision-making aid in legal, tax, economic or other matters. No liability is assumed for losses
or lost profits that could arise from the use of the information.
Swiss Exchange AG, ("SIX Swiss Exchange") is the source of the Swiss Performance Index (SPI) and the Swiss Bond Index (SBI) and the data contained
therein. SIX Swiss Exchange was in no way involved in the preparation of the information contained in this report. SIX Swiss Exchange makes no warranties
and excludes all liability (whether arising from negligence or otherwise) with respect to the information contained in this report - including but not limited to
accuracy, adequacy, correctness, completeness, timeliness and suitability for any purpose - and with respect to errors, omissions or interruptions in the SPI or
SBI or their data. Any dissemination or forwarding of the information originating from SIX Swiss Exchange is prohibited.
Baloise Market View, 29 May 2020 12
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