Macro
Recent economic data points have painted a bleak picture of the short-term outlook. Business confidence has plummeted, particularly in manufacturing, and large numbers of workers have applied for unemployment insurance. In the US alone, over 33.5 million have filed new jobless claims out of a total workforce of around 152 million. Governments have sprung into action to provide support for companies (via loan guarantees for example) and for households (via direct grants, partial payment of salaries, or government-sponsored part-time working). With new confirmed cases gradually coming under control, attention is turning to exit strategies from the lockdown. However, restrictions on activity are likely to linger and recovery will take time.
Central Banks
With key rates already close to zero or indeed negative across advanced economies, central banks have stepped up their asset purchases in recent weeks. The US Federal Reserve (Fed) has removed the ceiling on its programme and added recently-downgraded issuers (“fallen angels”) and High Yield (HY) Exchange Traded Funds (ETFs) to its shopping list. The European Central Bank (ECB) has also ventured into HY by including Greece in its purchases, while removing restrictions on issuer and issue size to gain more flexibility. The Bank of England has cut rates twice, from 0.75% to 0.1%, and announced £200 billion of new quantitative easing, bringing its bond buying program to a total of £645 billion. In its May 7 meeting, an additional £100 billion of stimulus was seriously in play.
Markets
The pace of CoViD-19’s spread has slowed to low single digits across the globe, enabling governments to begin to plan their exit strategies. Combined with enormous support from central banks and government spending, this has fostered a rally in risky assets such as equities. Although measures of investor sentiment like the VIX “fear index” have improved from recent extremes, they remain well above historical averages. Central bank asset purchases should provide direct support to fixed income markets.
Bottom line
Economic figures suggest a wasteland, with the expectation of even worse to come over the second quarter. On the other hand, global equities are technically in a new bull market. We remain defensively positioned and there is plenty to warrant caution. Since March, we have reduced risk across our multi-asset strategies and bolstered our defensive allocations by purchasing more government bonds. We will maintain current positions or adjust our asset allocation as guided by the pillars of our investment process: economic climate, valuations, momentum, and sentiment.
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For more information, please contact Sam Hartles, Private Banker sam.hartles@kleinworthambros.com
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