coronavirus: the recession will be deep, · new infections since 17 march. the number of new...

APRIL 2020

HOUSE VIEW

CORONAVIRUS:THE RECESSION WILL BE DEEP, BUT SHORT-LIVED

HOUSE VIEW. APRIL 2020

CORONAVIRUS: THE RECESSION WILL BE DEEP, BUT SHORT-LIVED 6

HOW SHOULD WE POSITION OURSELVES IN THE CURRENT LANDSCAPE?

Coronavirus: the recession will be deep, but short-lived

MACROECONOMIC LANDSCAPE

Following the quarantine measures, Covid-19 has been contained in China and the European countries that were hit first are now approaching the peak. We are expecting the number of cases in the US to increase steeply at the beginning of this month.

The coronavirus is now officially a pandemic. With almost a million cases globally, the draconian measures implemented by China mean that the country accounts for just 8% of the total number of infections worldwide. The US tops the list with a total of 220,000 cases, followed by Italy (110,000) and Spain (105,000).

ASSET ALLOCATIONASSET CLASS -2 -1 NEUTRAL +1 +2

LIQUIDITY

FIXED-INCOME

EQUITY

ALTERNATIVE

FIXED-INCOME -2 -1 NEUTRAL +1 +2

SOVEREIGN DEBT

High quality (AAA)

Peripheral

CORPORATE BONDS

Investment Grade

High Yield

EMERGING DEBT

CONVERTIBLE BONDS

EQUITIES -2 -1 NEUTRAL +1 +2

EUROPE

United Kingdom

UNITED STATES

EMERGING

REST OF THE WORLD

CURRENCIES -2 -1 NEUTRAL +1 +2

U.S. DOLLAR

STERLING POUND



Currently, around 40% of the global population is under lockdown and the mortality rate stands at 5%, suggesting that the widespread absence of tests means that we cannot yet gauge the true number of Covid-19 cases.

By regions, Asia appears to have left the worst of the crisis behind, spearheaded by China and South Korea, where things are gradually getting back to normal. However, there are still concerns over a possible second wave of infections and certain control measures remain in place. Foreign visitors are barred from entering China and cinemas have been ordered to close again after reopening briefly. To date, South Korea has done the best job of containing the virus; it managed to avoid shutting down economic activity thanks to strict population control and aggressive testing (see graph 1).

In Europe, Italy and Spain have been hit hardest and are at the top of the tragic global death toll, with a combined 50% of the total victims worldwide. In both countries, after a full lockdown cycle, the measures are now beginning to have a visible impact. On the last day of March, Italy – which was the first to roll out tough measures – recorded the highest number of Covid-19 patient recoveries to date (1,590 in a day) and the lowest number of new infections since 17 March. The number of new infections and deaths are both climbing swiftly in France, whilst Germany, thanks to its testing efforts, is seeing similar figures to Korea, though with more people signed off or self-isolating.

The major cause for concern at the moment is the US, where there has been a radical shift in President Trump’s initial stance after a huge jump in infection rates and the impact of the virus in cities like New York (84,000 cases and 1,400 deaths). The US President has announced – after extending the restrictions in place until 30 April – that the situation will be completely under control by 1 June.

If this public health crisis is temporary, as we expect it to be, then the quarantine measures will also be temporary, as will the economic downturn.

Governments are seeking to slow the rate of infection as much as possible to ensure health systems are not overwhelmed. Currently, the only way to fight coronavirus is with social distancing measures, which lead to an almost complete shutdown of economic activity. We are navigating a highly uncertain economic landscape and the global spread of the virus makes it very difficult to gauge the extent of the economic downturn we are facing. This is largely due to two factors: the severity of the quarantine measures required in each particular economy, and their duration. If the pandemic is temporary, then so too will be the quarantine measures and the knock-on effect on economic activity, and we expect to see activity resume to a large degree once the rate of infection begins to taper off.

1. NUMBER OF TESTS FOR COVID-19 Source: Johns Hopkins University and Banca March

2. INFECTIONS Source: Johns Hopkins University and Banca March

0 100.000 200.000 300.000 400.000

x million inhabitants

SwitzerlandNetherlands

JapanSpain

FranceUnited Kingdom

USAustralia

GermanyItaly

South Korea

1

10

100

1000

10000

100000

1000000

22jan.-20 5-feb.-20 19-feb.-20 4-mar.-20 18-mar.-20 1-apr.-20

Cas

es (l

og)

Spain Italy South Korea China USA Japan



China, which is where the outbreak began, will be one of the first economies to release figures revealing the degree of economic damage we can expect. For now, early data has confirmed the most pessimistic outlooks, with retail sales down 20.5% YOY in February (graph 3), evidencing the direct, severe impact of social isolation measures on consumption, which – as we have anticipated in previous reports – will be one of the components of GDP that suffers the most.

For Europe, which along with the US is the current epicentre of the pandemic, we only have access to business confidence data, which already reflects the impact of the public health crisis. Here too, the evidence points to a substantial drop in activity, with preliminary PMIs for March revealing no less than the largest downturn in history: the composite PMI contracted from 51.6 in February to 31.4 in March, dipping even lower than it did during the 2008 financial crisis (36.2). Business confidence levels fell most sharply in the service sector, which sustained a crippling blow from social distancing measures, with the PMI plummeting to 28.4, far below the previous low of 39.2 registered in February 2009.

In Spain, high-frequency indicators like electricity consumption are also demonstrating a significant economic impact. Since the state of emergency was announced, electricity demand is now 15% lower than it was last year. This indicator would suggest that the short-term drop in economic activity will be on an unprecedented scale.

4. PLUMMETING BUSINESS CONFIDENCE Source: Bloomberg and Banca March

31,4

44,8

28,4

25

30

35

40

45

50

55

60

feb.-20nov.-19aug.-19may.-19feb.-19nov.-18aug.-18may.-18feb.-18

Composite PMI Threshold Manufacturing PMI Services PMI

3. SEVERE DROP IN CONSUMER SPENDING Source: Bloomberg and Banca March

5. SPAIN: ELECTRICITY DEMAND Source: Red Eléctrica España and Banca March

-20,5-25

-20

-15

-10

-5

0

5

10

15

dec.-18 feb.-19 apr.-19 jun.-19 aug.-19 oct.-19 dec.-19 feb.-20

Retail sales

500

550

600

650

700

750

800

-12 -10 -8 -6 -4 -2 0 2 4 6 8 10 12 14 16

Elec

tric

ity

dem

and

(Gw

h)

Days since State of Emergency announced

2020

2019



How will global economic growth perform?

Given that we cannot know when the virus will be contained globally, any estimate we offer is approximate, and should be taken with caution. The best way to approach this exercise is to replicate economic recovery times in China, which managed to gradually reopen some of the affected areas within around two months. As illustrated by graph 6, activity data for China’s major companies shows that the economy is now operating at over 95% of capacity.

Extrapolating from this situation, our baseline scenario is that by late April or May, depending on the country, social isolation measures will begin to be lifted, which leads us to believe that global economic activity will begin to pick up by Q3 (see graph 7). Specifically, we expect to see the global economy plunge into a very deep recession in H1, but we also expect growth to rally in H2, taking global GDP growth for 2020 to -0.7% year on year; this is a substantial downgrade from the forecast growth rate for 2020 of over 3.5 percentage points.

6. RATE OF RETURN TO ECONOMIC ACTIVITY IN CHINA (LARGE COMPANIES) Source: Trivium and Banca March

Total rate of return97,1%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0%

2%

4%

6%

8%

10%

12%

Gua

ngdo

ngJia

ngsu

Shan

dong

Zhej

iang

Hen

anSi

chua

nH

ubei

Fujia

nH

unan

Shan

ghai

Anh

uiBe

ijing

Heb

eiSh

aanx

iLi

aoni

ngJia

ngxi

Chon

gqin

gYu

nnan

Gua

ngxi

Mon

golia

Inte

rior

Shan

xiG

uizh

ouTi

anjin

Hei

long

jiang

Xin

jiang Jilin

Gan

suH

aina

nN

ingx

iaQ

ingh

aiTi

bet

% T

otal

GD

P

% Total Chinese GDP Rate of return to work Total rate of return (right)

8. GDP GROWTH DOWNGRADES (REGIONS) Source: Oxford Economics and Banca March

-12

-10

-8

-6

-4

-2

0

US

April ‘20 Adverse

Eurozone Spain China World

7. GLOBAL GDP Source: Oxford Economics and Banca March

-6

-4

-2

0

2

4

6

8

10

05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21

Global GDP forecasts (YOY)

Adverse Activity resumed Q3 December '19



In the main regions, the initial virus outbreak date and the intensity of the isolation measures rolled out will determine the performance of economic activity and particularly the subsequent recovery. Specifically, we expect to see a very intense impact in the short term, with significant drops in GDP already taking place in Q1 in China and Spain, for example, whereas in the US and the eurozone as a whole, activity will drop off more steeply in the second quarter of the year. The uncertainty surrounding this scenario is unusually high, as the economic impact will depend largely on how long the measures needed to contain the virus remain in place, and the outlook in that respect is constantly changing. The US and the UK, for example, have been modifying their virus containment strategies constantly.

If the quarantine measures remain in place for longer than expected, the economic impact will be more severe. Graph 7 shows a more negative alternative scenario involving stricter, longer isolation measures in place until early summer in the northern hemisphere, in which the impact of deteriorating financial conditions would also cause increased destruction of the business landscape. In this scenario, we would see a negative structural impact on the economy and the recovery would not be quick. Global GDP would fall by over -2.5%, reflecting an even more dramatic contraction than in 2009, and the subsequent recovery would be more gradual, and would not begin until 2021.

This situation will generate the first global economic contraction since the 2008 financial crisis; however, we also believe it will be one of the shortest-lived recessions in economic history.

If this recession is to be quickly overcome, it is vital to ensure that the negative impact on the business landscape does not involve significant bankruptcies and job losses due to short-term funding difficulties.

Unlike at the onset of the 2008 financial crisis, the authorities currently have access to an extensive toolbox to fight the financial risks from the health crisis. As discussed in the first half of this report, the measures taken by central banks, coupled with the state-backed credit lines offered by governments, will provide for bridge financing and inject liquidity into the system, and thereby steer the financial markets back on course. The drop in activity will be steep, of that there is no doubt, but we trust that it will also be short-lived.



FIXED INCOME

Following the actions taken by central banks, we do not expect to see major shifts in long-term rates, as monetary authorities will be looking to avoid excessive peaks in the cost of funds from now on.

This is clearly evidenced by the performance registered in March, when central banks were able to mitigate the pressure on bond prices stemming from scepticism around governments’ capacity to fund the budget deficits being racked up to cushion the impact of quarantine measures.

The tensions were exacerbated particularly in the most heavily indebted European countries, such as Spain, Italy and Portugal, where sovereign credit spreads widened to 146 bps, 278 bps and 170 bps, respectively. The safest sovereign debt performed similarly; yields stood at 1.15% on 10-year US Treasuries and -0.20% on German Bunds.

Central banks reacted decisively to the pressure on sovereign bonds. As graph 9 shows, the ECB managed to contain rising yields on sovereign debt first by announcing an emergency bond-buying programme and then by scrapping limits on its purchases of each state’s debt. By doing so, it sent a clear message: it will guarantee low funding costs to allow states to increase their deficits.

In the US, the Fed moved to limit the drop in the price of 10-year Treasuries, which, thanks to their high liquidity, had been hit hard by mass bond fund redemptions. Its actions pushed 10-year Treasuries back up to the current levels of 0.6%.

In light of recent events, we believe that central banks will protect interest rates from upside pressure to allow states to finance their deficits.

9. PERFORMANCE OF BUNDS AND PERIPHERAL SOVEREIGN CREDIT SPREADS Source: Bloomberg and Banca March

ECB: PandemicEmergency Purchase

Programme

ECB: Estimatedlimits on purchases

by State

-0,9

-0,8

-0,7

-0,6

-0,5

-0,4

-0,3

-0,2

-0,1

0

20

70

120

170

220

270

1-jan. 16-jan. 31-jan. 15-feb. 1-mar. 16-mar. 31-mar.

IRR

(%

)

Sove

reig

n cr

edit

spre

ad (b

ps)

Spain Portugal Italy Germany (right)



10. CREDIT SPREADS Source: Bloomberg and Banca March

618 461215

167

93

93

278 239

0%

20%

40%

60%

80%

100%

eporuEUS eporuEUS

Perc

enti

le

Invesment grade

2008 high 2016 high End of 2019 Current 2008 high 2016 high End of 2019 Current

31021791839

583

336 292

909

775

0%

20%

40%

60%

80%

100%Pe

rcen

tile

High yield

The coronavirus has led to dislocation in the credit market.

Corporate debt has been battered by the coronavirus, and has been one of the worst performing asset classes due to increased risk aversion in recent weeks. High yield debt has suffered the most, particularly in the US energy sector (20% of the index) and the transport sector, with spreads widening dramatically to price in an expected hike in default rates in the months ahead.

As graph 10 shows, the current spreads on European Investment Grade (IG) credit are just 50 basis points lower than the yields on high yield debt just three months ago. Aggregate European investment grade credit offers an IRR of 1.8%, just 100 bps lower than HY was paying just one month ago.

The recent widening of spreads and the purchases to be rolled out by central banks play in favour of taking positions in investment grade debt, which currently offers greater upside potential than it has for some time.

Our cautious positioning in corporate debt, with a negative outlook for HY, has worked well. For the moment, despite the fact that premiums on the lowest-rated debt have spiked and are on a par with the 2008 financial crisis, we still recommend taking a cautious stance. However, we do believe it is worth harnessing this opportunity to take positions in IG, which will allow us to benefit from the future normalisation of the market. Although the rally in IG will be less powerful than in HY, we believe that the risk premiums are compelling at current levels and the margin of safety is broader, especially bearing in mind that central banks themselves are buying up IG debt within their bond-buying programmes.

It is also worth highlighting that IG-rated companies (from BBB- to AAA as assigned by Standard and Poor’s) are resilient; even in crises like 2008, default rates remained low, at around 0.6%. Currently, default probabilities implied from spreads stand at 5%, which is a long way off what has actually happened historically.

Finally, along with the compelling valuations, it is important to remember that the risk of further losses will be mitigated by central bank support, as their extensive bond-buying programmes will be largely focused on IG. This is in addition to interest rates which we expect to remain low for a long period of time. In fact, futures curves for short-term rates the US are at around 0% until 2023. In Europe, three month Euribor futures are pricing in rates of 0% until December 2025.



Our buy recommendation for the best-rated credit in light of the current dislocation is largely due to our conviction that over the coming months we will see increasing rating downgrades, which could generate additional pressure on the asset class, especially HY (graph 11).

11. CREDIT RATING REVISIONS Source: Oxford Economics and Banca March

12. COMPOSITION EUROPEAN IG CREDIT INDEX Source: Oxford Economics and Banca March

0,00

0,50

1,00

1,50

2,00

05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20

Credit rating revisions(S&P, Upgrade/downgrade, 4-quarter average)

US Revisions Europe Revisione Threshold

BBB52%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

06 07 08 09 10 11 12 13 14 15 16 17 18 19 20

BBB A AA AAA

As graph 12 shows, the current composition of IG credit indices reflects a larger proportion of companies with ratings at the lower end of the IG scale, with BBB-rated companies accounting for over 50% of issuances. A rating downgrade would push these issuances into the high yield bracket, which would automatically force sell-offs by investment funds and particularly ETFs. These issuances being downgraded into the HY market could exert greater pressure on this segment, increasing supply in a less liquid market. We therefore recommend taking positions in investment grade credit, but with limited exposure to the lowest-rated bonds in the IG category (BBB-).

Emerging market fixed income in hard currency continues to offer a stronger outlook than other assets with similar risk profiles.

Fixed income in hard currency has also been impacted by the tension generated by Covid-19. However, it continues to offer compelling valuations versus both HY and debt denominated in local currencies. As graph 13 reveals, fixed income in local currency has dropped to the lowest IRR levels since 2010 in recent months. This is a result of the aggressive rate cuts undertaken by its respective central banks in order to buoy their economies. These cuts have generated a sharp depreciation in emerging currencies throughout March, especially in more oil-dependent economies like Russia and Brazil. In March, the ruble and the real were down 15% and 14% against the dollar, respectively. The performance registered YTD by emerging market debt in hard currency has been very similar to local currency-denominated debt, falling -12% against the dollar.

At current levels, we continue to prefer hard currency, which offers both lower risk and higher IRRs.



13. EMERGING MARKET DEBT IRR Source: Bloomberg and Banca March

6,2%

6,0%

5,4%4,3%

7,4%

4,3%0%

20%

40%

60%

80%

100%

Hard currency Local currency

Perc

entil

e

2016 high End of 2019 Current

OIL

Oil prices will not recover until Saudi Arabia and Russia reach an agreement to cut production. The US could position itself as a mediator between the two countries, and may also reduce its own exports.

The oil market is currently facing an unprecedented situation: a major drop in demand due to the economic standstill sparked by Covid-19 (-20% according to the International Energy Agency), coupled with a failure by key producer countries to agree to cut output.

The drop in demand could reach 21 million barrels a day, which is close to the daily output of the OPEC countries and equivalent to daily consumption in the US, Canada and Mexico combined.

On the supply side, the failure by Saudi Arabia and Russia to reach an agreement for additional production cuts has triggered an incipient price war. Saudi Arabia is to step up pumping to 10.6 million barrels a day in May, snatching market share from the US, which has become the world’s largest producer in recent years (see graph 16). As we head into Q2, excess supply will stand at around 5 million barrels a day.

The curve is now in the steepest contango in history, evidencing the oversupply in the market.

Brent has priced in this situation, dropping to $22.7 a barrel, down 55% over the month and 65% over the quarter to an almost 18-month low. The extreme weakness is also reflected in the futures curve, which is now in the steepest contango in history, with a discount of -$51/barrel on front month prices versus deliveries in 12 months’ time. This situation is utterly atypical, as in the oil market, investors tend to pay more to buy crude immediately with a view to saving on storage costs. As graph 14 shows, the current degree of oversupply is even higher than it was at the worst points of the 2008 financial crisis.



Any recovery in prices over the months ahead will require a drastic reduction in supply. It is possible that the US, which has garnered the largest market share over the few years (13 million barrels a day), could spearhead the reduction in output as a gesture of goodwill towards Saudi Arabia and Russia to encourage them to resume negotiations. The announcement that it will begin buying crude for its strategic reserves could be a good starting point, but failed to generate a positive response in crude prices.

Nobody stands to gain from the current situation. Whilst the cost of the current trade war is significant, the Saudis could absorb the cost more easily than other economies, with a cost of $50bn/year and a low public debt over GDP of just 24% in 2019.

14. BRENT ENTERS STEEPEST CONTANGO IN HISTORY Source: Bloomberg and Banca March

15. MAIN PRODUCERS Source: Bloomberg and Banca March



EQUITIES

The sharpest correction in history, pricing in an imminent recession.

Since the record highs chalked up on 19 February, the S&P 500 has lost 24%, although at certain points these losses have been as steep as 35%. In historical terms (see table), these losses are largely parallel to other bear market episodes. What sets this particular correction apart is the speed at which it has taken place. In a single month, equities have already suffered almost the entirety of the losses sustained in previous crises.

It is still too soon to be overweight equities. We are holding our investments, stepping up positions in sectors like tech and healthcare.

The speed of the correction leads us to believe the market must be close to finding a bottom. However, the specific characteristics inherent to this crisis mean we remain cautious. In the short term, global equities will continue to show high levels of volatility until it becomes clear whether the isolation measures have successfully contained the spread of Covid-19. We will therefore wait to raise equity exposure and maintain, for the moment, a less aggressive stance until there is greater clarity. It is important to remember that a possible extension to the quarantine period would put additional pressure on corporate earnings for business models with the greatest exposure to the cycle, such as transport and consumer discretionary, meaning we currently need to be positioned in quality companies with lower levels of debt.

The painful but short-lived recession we expect will also lead to a steep drop in corporate earnings versus the record results registered last year (graph 16), and in dividend payouts.

Market peak

Peakto trough

Duration(months)

Beginning ofbull market

Troughto peak

Duration(months)

ed c.-61 -26% 7 jun.-49 418% 1501962 flash crash. Cuba missile crisis1970 tech crash - economic overheatingStagflation - OPEC oil embargoVolcker - campaign to target inflation1987 Crash - automatic trading, overheated marketsTech bubble - high valuations, dotcom bubbleFinancial crisis - Lehman collapse, high leveraging, property bubbleCovid-19

MEDIA

nov.-68 -33% 18 jun.-62 106% 7712%84-37-.jan may.-70 66% 32

08-.von -26% 21 oct.-74 125% 73aug.-87 -33% 3 aug.-82 224% 60

mar.-00 -48% 31 dec.-87 582% 147oct.-07 -56% 17 oct.-02 95% 60feb.-20 -24% ? mar.-09 395% 131

-39% 17 251% 91 ---

US BULL AND BEAR MARKETS

Market corrections Bull markets Bear markets

16. CORPORATE EARNINGS AND DIVIDENDS (S&P 500) Source: Robert J. Shiller and Banca March

0

10

20

30

40

50

60

70

0

20

40

60

80

100

120

140

160

25 28 31 34 37 40 43 46 49 52 55 58 61 64 67 70 73 76 79 82 85 88 91 94 97 0 0 03 06 09 12 15

Earnings and dividends

Recession Earnings Dividends (Right)

Source: Bloomberg, J.P. Morgan and Banca March. Weekly data as of 03/31/2020



Market expectations of corporate earnings for this year have not yet factored in this scenario, and in our opinion, analysts will not revise their forecasts until mid-April when Q1 results are posted. The social distancing measures and the resulting screeching halt in economic activity will lead to a major drop in corporate earnings, which we expect to be down by over 20% for the year as a whole. As reflected in graph 17, we are still in the early stages of earnings forecast reviews and there is still room for further downgrades, especially if we compare the current situation with the 2008 crisis.

Dividends continue to diminish.

Lower earnings and companies’ efforts to tackle both the downturn generated by Covid-19 and the current uncertainty by holding on to larger liquidity reserves will continue to drive down dividends. Dividend futures point to steeper cuts in Europe (-56%) than in the US (-30%, graph 19), which can be explained by two factors. Firstly, there is a stronger tradition of dividend payouts in Europe, and secondly, the greater weighting of tech names in the US market, which have substantial cash reserves. Shareholder remuneration policies, based on the consensus forecast, will not return to normal until 2022. The forecasts also suggest that cuts to dividend payouts in the US will be tougher than they were in the previous financial crisis (-25%).

17. EARNINGS GROWTH ESTIMATES (MSCI AC WORLD) Source: Refinitiv and Banca March

18. DIVIDENDS: IMPLIED DECREASE Source: Bloomberg, Refinitiv and Banca March

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

jan. apr. jul. oct. jan. apr.

Performance and estimated growth in EPS

2008 2009 2020 2021

-30,3%

-56,9%

-23,4%

-11,5%-6,2%

0,8%3,3%

27,7%

3,9%

-80%

-60%

-40%

-20%

0%

20%

40%

S&P 500 Eurostoxx 50 Nikkei2020 2021 2022



In past crises, defensive sectors with strong cash generation capacity, such as Heathcare, Telecoms and Utilities were best able to maintain shareholder remuneration policies. In the financial sector, we believe most European banks will respect regulator recommendations to suspend dividend payments to shore up capital levels, as we have already seen in the UK.

In addition to the cancellation of dividends by UK banks at the orders of the Bank of England, ING will not be paying out dividends until at least October, Santander has cancelled its 2020 interim dividend and Bankia has delayed its interim dividend and cancelled its extraordinary payout. In the fashion industry, Inditex has scrapped its dividend until at least July and in the aerospace sector, Airbus has cancelled its interim dividend. Companies like Amadeus, which is closely linked to the air transport and tourism sectors, and car makers like Ford have also announced that they are cancelling dividend payouts. On the flipside, despite the major market downturn, oil companies like Total and Repsol have left dividend programmes untouched but have cancelled treasury stock buybacks. Companies such as Telefónica, Naturgy and Endesa have also kept their shareholder remuneration plans in place.

What will it take for the equity markets to stabilise?

We will need to see a combination of three factors: a slowdown in new infections, combined with both monetary stimulus/liquidity lines and the support of fiscal measures that will help step up demand once the public health crisis is contained and activity begins to pick up.

As we mentioned in the first section of this report, the good news is that monetary and fiscal measures – though they appear to lack coordination – have now reached substantial levels. The focus over the days ahead will be on the spread of the virus in the US and on whether or not Trump will eventually declare a national emergency

What structural economic changes will this health crisis generate that could represent an opportunity?

The aggressive intervention measures taken will curtail economic growth potential once we overcome the downturn caused by Covid-19. We therefore believe it is worth reiterating our sector-specific recommendation, which is to step up exposure to the tech sector (a source of growth in a world which is not growing) and also healthcare, which will mean harnessing opportunities in countries where these sectors have the strongest presence: the US and Emerging Markets, which offer greater upside potential than Europe on the back of recent losses.

By sectors, tech and healthcare companies offer greater resilience to Covid-19 than banks, industry and energy.

Our recommendation to be overweight the health sector has proven apposite (-3.1% in Europe, which is the region we like best in the sector, and -4% in the US). Whilst we will see further downgrades to profit forecasts, health sector names offer expected single-digit EPS growth on average in 2020 and 10% EPS growth in 2021 and 2022. We continue to like the sector, which offers robust balance sheets, resilient revenues and dividends which are likely to consolidate even against the current backdrop.

Tech also continues to perform well (-8% US, -13% Europe), with far above average earnings growth forecasts (+10%, +17% and +12% over the next three years in the US) and with clear evidence over recent weeks of how some of the sector’s developments contribute to adapting our way of life: home working, online teaching, content via streaming, socialising via social media and meal delivery services.

At the sector level, the global economic slowdown triggered by the pandemic has been priced into the performance of the financial and industrial sectors, with losses over the month of 20% or more in both the US and Europe. Elsewhere, plummeting crude prices and the drop in demand impacted the energy sector, which performed worse in the US (-35%) than in Europe (-15%) as the US has more service companies providing auxiliary support for exploration and production, which is the business segment that has been hit the hardest.



CURRENCIES

EUR/USD target range: 1.15.

The currency has registered major volatility, following in the wake of the measures announced by central banks and governments. As the virus began to spread globally and the US government initially failed to act, the euro dollar cross hit our target levels of 1.15. The situation shifted after the initial confinement measures were announced in the US and the Fed gave its backing to fiscal stimulus packages, allowing the greenback and US sovereign debt to recover their safe haven status. The decline was swift and in under two weeks, the euro dollar cross was back at three year lows. However, in the last week of March the euro gained ground again after the infection rate rose in the US and began to slow in Italy and Spain.

We believe that the major drop in interest rate spreads and the extent of the fiscal packages adopted by the US, which will drive up its public deficit even further, should push the euro - dollar back to a level that better reflects the fundamentals. Also, in the short term, the relative exacerbation of the health crisis in the US could contribute to a weaker greenback.

Source: Bloomberg; Banca March

19. INTEREST RATE SPREADS AND EUR/USD Source: Bloomberg and Banca March

1,0

1,1

1,2

1,3

1,4

1,5

1,6

-4,0

-3,0

-2,0

-1,0

0,0

1,0

2,0

3,0

07 08 09 10 11 12 13 14 15 16 17 18 19 20

2 year spread (Germany-US) Euro Dollar (Right)

1M Max MinTechnologyDiscretionary spendingFinancialHealthIndustryMaterialsUtilitiesReal estateTelecomsConsumer staplesEnergyS&P 500

SECTORYTD

Evolution (%)

-8,71-13,39-21,48-3,98

-19,29-14,35-10,22-15,40-12,21-5,86

-34,97-12,51

-11,93-19,29-31,95-12,67-27,05-26,14-13,50-19,21-16,95-12,74

-50,45-19,60

-21,60-24,62-33,42-15,59

-30,59-27,12

-21,69-25,96-22,33-15,83-56,11

-23,84

17,9619,5318,75

20,3423,5217,7727,5224,3313,0013,9829,5117,92

1,581,57

3,021,932,692,933,613,871,533,13

8,002,34

Rtb.Div. (%)

Sector performance US Sector performance Europe

52 Weeks (%)1M Max Min

TechnologyDiscretionary spendingFinancialHealthIndustryMaterialsUtilitiesReal estateTelecomsConsumer staplesEnergyS&P Europe 500

SECTORYTD

Evolution (%) Rtb.Div. (%)

52 Weeks (%)

-13,18-18,56-27,53

-3,17-20,61-13,36-16,47

-22,09-16,96-4,90-15,36-14,45

-15,40-29,15-33,23-6,64-28,11

-25,06-11,56

-26,68-24,02-12,77-32,81-22,41

-25,20-31,30-39,37-15,31-31,33

-26,70 -25,59-31,18

-28,98-16,98-40,87-25,94

20,6120,5112,9620,1520,4320,47

15,7115,6616,6817,0656,1919,50

1,924,027,71

3,023,555,025,185,536,163,308,944,58



We remain positive on the pound sterling. Target range: 0.83 – 0.85 EUR/GBP.

Major depreciation in the pound, which fell to 0.95 in early March, a level that has only been seen before at moments of peak Brexit tension. The failure by Boris Johnson’s government to take action as the pandemic spread through Europe had a severe impact on the performance of the British currency. It was in mid-March that the government changed tack and started gradually taking measures which have eventually been extended into similar lockdown measures as in other European countries. These measures have restored confidence in sterling, triggering an appreciation of almost 6% in the last eleven days of the month.

We expect the pound to return gradually to its target range of 0.83 - 0.85 EUR/GBP as the UK’s approach to tackling the pandemic becomes clear and the quarantine measures begin to drive down the Covid-19 infection rate.

Banca March Market Strategy Team

Joan Bonet MajóPedro SastreLuis CoelloPaulo Gonçalves, CAIAAdrián Santos



EURIBOR 12 MONTHS (3 YEARS)

EUR/USD (3 YEARS)

10 YEAR GOVERNMENT YIELDS (SPAIN VS GERMANY)

IBEX (3 YEARS)

COMMODITIESLAST 1 MONTH YTD 1 YEAR

BRENT 22,74 50,52 68,44 68,39

GOLD 1577,2 1585,7 1515,2 1292,4

CORPORATE BONDS (1 YEAR SPREAD)

LAST 1 MONTH YTD 1 YEAR

AA 0,61 -0,27 -0,27 -0,22

A 0,64 -0,25 -0,26 -0,18

BBB 0,86 -0,15 -0,16 -0,07

EURIBORLAST 1 MONTH YTD 1 YEAR

1 MONTH -0,44 -0,49 -0,45 -0,37

3 MONTHS -0,35 -0,42 -0,39 -0,31

6 MONTHS -0,28 -0,39 -0,33 -0,23

12 MONTHS -0,16 -0,31 -0,24 -0,11

CURRENCIESLAST 1 MONTH YTD 1 YEAR

EUR/USD 1,1031 1,103 1,120 1,122

EUR/GBP 0,888 0,860 0,854 0,861

EUR/CHF 1,060 1,065 1,086 1,116

EUR/JPY 118,6 119,0 122,0 124,4

GOVERNMENT BONDSLAST 1 MONTH YTD 1 YEAR

USA

2 YEARS 0,25 0,91 1,57 2,33

5 YEARS 0,38 0,94 1,67 2,32

10 YEARS 0,67 1,15 1,88 2,50

30 YEARS 1,32 1,68 2,33 2,89

GERMANY

2 YEARS -0,69 -0,77 -0,60 -0,60

5 YEARS -0,65 -0,76 -0,47 -0,42

10 YEARS -0,47 -0,61 -0,19 -0,03

30 YEARS 0,03 -0,15 0,35 0,62

SPAIN

2 YEARS -0,19 -0,43 -0,39 -0,36

5 YEARS 0,15 -0,19 -0,08 0,08

10 YEARS 0,68 0,28 0,47 1,14

30 YEARS 1,51 1,05 1,32 2,29

UK

2 YEARS 0,14 0,31 0,59 0,67

5 YEARS 0,21 0,33 0,65 0,79

10 YEARS 0,36 0,44 0,87 1,05

30 YEARS 0,83 0,94 1,38 1,59

EQUITY INDICES (3 YEARS)LAST 1 MONTH YTD 3 YEARS

MSCI WORLD* 442,35 -13,73% -21,62% -1,45%

SP500 2584,59 -12,51% -19,77% 9,39%

EUROSTOXX50 2786,9 -16,30% -25,65% -20,40%

TOPIXX 1403,04 -7,14% -18,49% -7,24%

IBEX35 6785,4 -22,21% -29,41% -35,15%

FOOTSIE100 5671,96 -13,81% -25,24% -22,55%

MSCI BRAZIL 1172,1 -38,27% -50,61% -36,12%

MSCI CHINA 76,52 -7,10% -11,03% 15,28%

MSCI EMERGING 848,58 -15,61% -24,13% -11,46%

Data: Bloomberg* All countries

7000

6000

8000

9000

11000

12000

apr.-17 jul.-17 oct.-17 jan.-18 apr.-18 jul.-18 oct.-18 jan.-19 apr.-19 jul.-19 oct.-19 jan.-20

-1

-0,5

0

0,5

1

1,5

2


1

1,05

1,1

1,15

1,2

1,25

1,3


-0,45

-0,4

-0,35

-0,3

-0,25

-0,2

-0,15

-0,1

-0,05

0




EQUITY INDICES PERFORMANCE (3 YEARS)Data: Bloomberg

IBEX REL

MSCI EMERGENTES REL

SP500 REL

160%

140%

120%

100%

80%

60%

40%

IBEX rel MSCI Emergentes rel SP500 rel

may.-17 aug.-17 nov.-17 feb.-18 may.-18 aug.-18 nov.-18 feb.-19 may.-19 aug.-19 nov.-19 feb.-20

*DATA AS OF 31 MARCH 2020

RETURN DURATION PORTFOLIO DISTRIBUTION

MONTH YTD 1 YEAR CURRENT 1 MONTH AGO FI EQUITY ALT. INV.

MARCH RENDIMIENTO F.I.

MARCH RENTA FIJA CORTO PLAZO F.I.

-0,11%

-2,37%

-2,04%

-4,00%

-19,70%

-20,33%

-19,36%

-15,64%

-15,61%

-18,88%

-19,31%

-5,45%

-10,81%

-14,56%

-5,52%

-3,80%

-14,18%

-4,32%

-6,02%

-7,75%

-12,14%

-3,34%

-7,30%

-9,67%

-15,72%

-8,81%

-8,33%

-5,95%

-13,73%

-0,16%

-2,39%

-2,07%

-3,99%

-29,18%

-27,82%

-30,03%

-25,81%

-22,72%

-25,62%

-26,59%

-7,72%

-15,88%

-22,77%

-7,79%

-9,16%

-22,10%

-4,81%

-7,87%

-11,21%

-17,99%

-3,46%

-10,21%

-14,90%

-24,79%

-12,56%

-11,91%

-8,71%

-22,31%

-0,47%

-2,14%

-1,90%

-3,12%

-33,51%

-23,47%

-21,98%

-24,74%

-15,03%

-24,71%

-5,80%

-12,08%

-16,65%

-6,40%

-8,15%

-19,71%

-4,66%

-6,22%

-7,98%

-13,71%

-3,13%

-6,75%

-9,30%

-15,18%

-7,87%

-7,49%

-5,91%

-12,66%

0,250

0,462

0,712

1,978

0,003

0,003

0,003

0,003

0,003

0,003

0,881

0,864

0,003

0,003

0,003

0,003

0,003

0,003

1,310

2,030

1,941

0,003

1,961

1,955

1,577

0,003

0,000

0,484

0,000

2,106

0,000

0,003

0,003

0,003

0,003

0,000

0,960

1,069

0,003

0,003

0,000

0,000

0,000

0,000

0,000

2,154

0,000

0,000

0,000

0,000

0,000

0,000

46,83%

77,26%

75,13%

87,46%

0,00%

0,00%

0,00%

0,00%

0,00%

0,00%

0,00%

67,40%

42,64%

0,00%

71,87%

22,20%

12,08%

52,05%

43,01%

24,61%

0,94%

83,60%

69,85%

49,67%

0,00%

61,51%

59,90%

62,53%

0,00%

0,00%

0,00%

0,00%

0,00%

100,61%

100,34%

94,41%

94,06%

93,85%

98,43%

98,91%

18,40%

50,73%

87,52%

18,81%

44,98%

85,40%

3,24%

20,07%

45,90%

78,31%

0,00%

19,91%

42,11%

87,37%

27,85%

25,14%

17,83%

85,66%

0,00%

0,00%

0,00%

0,00%

0,00%

0,00%

0,00%

0,00%

0,00%

0,00%

0,00%

0,00%

0,00%

0,00%

0,00%

0,00%

0,00%

29,89%

30,24%

25,23%

18,60%

0,00%

0,00%

0,00%

0,00%

0,00%

0,00%

0,00%

0,00%

MARCH PATRIMONIO C.P. F.I.

FONMARCH F.I.

MARCH EUROPA F.I.

MARCH INTL - VALORES IBERIAN EQUITY

MARCH INTL - MARCH VINICATENA

MARCH INTL - THE FAMILY BUSINESSES FUND

MARCH INTL - MEDITERRANEAN FUND

MARCH GLOBAL F.I.

MARCH NEW EMERGING WORLD F.I.*

TORRENOVA DE INVERS. S.I.C.A.V. S.A.

CARTERA BELLVER S.I.C.A.V., S.A.

LLUC VALORES S.I.C.A.V., S.A.

MARCH INTL - TORRENOVA LUX

MARCH INTL BELLVER LUX

MARCH INTL LLUX LUX

MARCH PATRIMONIO DEFENSIVO F.I.*

MARCH CARTERA CONSERVADORA F.I.*

MARCH CARTERA MODERADA F.I.*

MARCH CARTERA DECIDIDA F.I.*

PLAN PENSIÓN CRECIENTE, F.P.

MARCH PENSIONES 80/20, F.P.

MARCH PENSIONES 50/50, F.P.

MARCH ACCIONES, F.P.

MARCH AHORRO, F.P.

PLAN ÓPTIMO, F.P.

MARCH MODERADO EPSV

MARCH ACCIONES EPSV



IMPORTANT REMARK:

The contents of this document are merely illustrative and do not pretend, are not and cannot be considered under any circumstances as an investment recommendation towards the contracting of financial products. This document has only been prepared to help the customer make an independent and individual decision but does not intend to replace any type of advice needed for the contracting of such products. The terms and conditions described in this document are to be viewed as preliminary terms only, subject to discussion and negotiation as well as to the agreement and final drafting of the terms affecting the transaction, which will appear in the contract or certificate to be issued. Consequently, Banca March, S.A.. and its customers are not bound by this document unless both parties decide to embark on a specific transaction and agree on the terms and conditions concerning the final documents to be approved. Banca March, S.A.. does not offer any guarantee, expressly or implicitly, in relation with the information shown in this document. All terms, conditions and prices contained in this document are merely informative and subject to modifications depending on the market circumstances, changes in laws, jurisprudence, administrative procedures or any other issue which may affect them. The customer should be aware that the products mentioned in this document may not be appropriate for his/her specific investment targets, financial situation or risk profile. For this reason the customer must make his/her own decisions by taking into account such circumstances and by obtaining specialised advice in tax, legal, financial, regulatory, accounting issues or any other type of information required. Banca March, S.A.. does not assume any responsibility for any direct or indirect costs or loss which may result from the use of this document or its contents. No part of this document can be copied, photocopied or duplicated in any way or through any means, redistributed or quoted without a previous written authorisation by Banca March, S.A.

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