Monthly Update – June 2020

Summary

• In recent weeks, visibility concerning financial markets and more specifically, in relation to economic developments, has improved significantly.
• Models that map the dynamics of how the Covid-19 virus spread have worked well so far. They, therefore, provide us with a good estimate of future developments, especially concerning the dangers of a second wave of virus infections.
• Based on the evaluation of various early warning indicators and the current speed of the spread of Covid-19, we are currently considering the financial markets situation to be less negative than a month ago.
• We have slightly increased risk exposure within our strategies from a previously defensive position to one that is more neutral, plus we are intensifying our search for interesting opportunities in sectors severely affected by the crisis.
• New developments will be strongly influenced by the hopes of a vaccine: an effective vaccine would provide a strong positive impact on the recovery potential of certain sectors e.g. leisure, airlines and more generally cyclical sectors.

Highlights and key changes

• Various indicators that have so far been reliable have signalled that the situation is stabilising. The downward momentum of the Weekly Fed Economic Index is clearly decreasing and unemployment figures in the US are likely to have passed their peak. This is crucial for restoring future consumer confidence.
• Reliable early warning indicators, such as the price of copper or the yield curve structure, are also providing more positive signals once again. In addition, the upward trend of the US dollar is losing strength, which is providing relief for many emerging markets and giving local central banks greater room to manoeuvre. Inflation also remains under control, allowing continued ultra-loose monetary policy to persist worldwide.
• In addition, the risks of market failure have declined sharply. The oil market in particular has stabilised. The risk of contagion to other markets (e.g. high yield or government bond interest rates) is now much lower. Nevertheless, we expect an ongoing oversupply to affect oil prices for the time being, with demand remaining low. This should prevent significantly higher oil prices for the foreseeable future.
• Promising reports on various vaccine projects are currently influencing market expectations. So far, test results have shown that there are potential vaccines that can create Covid-19 antibodies and that these are well tolerated. This is a decisive step. However, being able to make large quantities of a vaccine for worldwide use is not expected to be feasible until the end of this year, at the earliest.
• The further development of financial markets is strongly driven by expectations regarding the availability of a vaccine. A second wave of the epidemic cannot be ruled out at the moment. The current loosening of the economic restrictions in many countries is in some cases very risky, especially in the US. Nevertheless, the definite announcement of a vaccine would support financial markets. This would occur regardless of whether there is a second wave of infections or a delay in the release of the vaccine until early 2021.
• However, experience to date in countries that have remained open or have already re-opened (Sweden, South Korea and Taiwan) suggests that there is limited risk of a large second wave. Smaller waves, such as in the case of a Chinese city or in Singapore, also appear to be manageable so far.
• In particular, some sectors will benefit more from the availability of vaccines than others. It is possible that traditional growth sectors that have been favoured so far will lose relative strength in favour of distressed sectors. These include transportation and leisure, or more generally, the services and consumer sectors, as well as cyclical sectors. We are currently conducting extensive sector analysis to understand these developments.
• We are increasing our risk exposure across all our strategies from defensive to neutral, due to improvements in visibility and the forward-looking indicators we look at. We are also taking into account the regional and sectoral differences during a potential recovery and positioning ourselves accordingly.

Topics on the radar

Historically, the copper price has always been a reliable leading indicator for the global economy and especially for China. The following chart shows that the copper price never completely collapsed during the Covid-19 crisis. The price of copper was much more stable than could be expected given the collapse in the global economy. Copper has therefore signalled a relatively quick normalisation in aggregate demand and in industrial production – at least in China.

Chart: Copper price

Source   Trading Economics

Please note with regards to the table of asset class preferences:
In the current fast-changing environment, we have decided not to present the usual table of country and sector preferences. Relatively static information is of limited use as positioning can change quickly. Our current preference has been on debtors whose credit quality is high enough to survive a prolonged recession. We also prefer securities with good market liquidity. However, due to improvements in the indicators we look at, we are increasingly seeking opportunities in challenging sectors with a high recovery potential.