Johanna Kyrklund: How markets have evolved since stimulus announcements

In the past two weeks, we’ve seen enormous volatility in markets, lockdown measures ramped up in Europe, rapidly rising infection rates in the UK and US, and a massive policy response around the world from central banks and governments.

People are learning to live with coronavirus, but this essentially means hibernating. The fiscal response we have seen is essential to provide life-support to the global economy, at least until we see a stabilisation in the Covid-19 cases.

Given the lockdowns in place, the policy response is not going to be enough to spark an economic recovery.

As multi-asset investors, we constantly assess and evaluate the relationships between different assets. The valuations we see in stock markets right now are consistent with a short, sharp recession, followed by a V-shaped recovery. But it’s becoming increasingly clear that the return to normality may take longer than originally expected.

On the positive side, the substantial provision of liquidity from the US Federal Reserve (Fed) is having a beneficial impact, particularly on credit markets.

It has stabilised cross-currency swap markets by reopening currency swap facilities with other major central banks. This is a key dollar-funding tool for foreign borrowers.

The Fed has also expanded its commercial paper buying programme, relaunched its Primary Dealer Credit Facility and introduced the Secondary Market Corporate Credit Facility to provide liquidity for outstanding corporate bonds including Exchange Traded Funds (ETFs).

This all provides an important backstop and allows credit market stress to abate as companies gain access to some of the funding they so desperately need.

In terms of positioning, an improved liquidity environment and an uncertain economic outlook has led us to increase our exposure to investment grade corporate debt. It is the sector benefiting most from the Fed’s actions and yields in relation to Treasuries (i.e. spreads) are looking very attractive.

So far, we are sitting tight in relation to equities and high yield corporate debt. We are biding our time to add to our exposures as markets still need to process the significant demand shock caused by Covid-19. However, we do see some value in emerging equities relative to US equities after recent market moves.

Turning to government bonds, we think they look expensive. That said, we do expect them to be negatively correlated to equities, which has not always been the case in recent times. Although we think inflation may resurface eventually, the risk of deflation is more prominent for now, despite the substantial stimulus.

Substantial rate cuts in the US have dimmed the appeal of the US dollar. With most major economies either exposed to the coronavirus directly or indirectly via its impact on global demand, we see limited opportunities to use currencies as safe havens.

With events moving quickly, we will continue to provide regular updates as our views evolve on investment opportunities that may arise, as well as risks to be aware of.


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