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What happens next ?
A. AN IMPROVED ECONOMIC OUTLOOK
Encouraged by the relaxation of lockdown measures and the continuation of recovery plans, the economy is starting to pick up, especially in the United States:
- In the United States, the Q2 growth rate was better than expected, driven by the manufacturing sector and real estate (fourth consecutive increase in leading business indicators, consumption up year-on-year, production and orders for durable goods picking up, and construction permits increasing).
- In the Eurozone, growth figures are broadly in line with expectations, with disparities, with leading activity indicators remaining in the expansion zone, although a slowdown has been observed without calling into question the rebound expected in Q31.
Although distinctly gloomy in absolute terms, business performance has proved to be surprisingly positive over the summer months:
- In the United States, 64.8% of businesses were remarkably positive in terms of turnover, with 82.7% reporting a surprisingly good net income (up sharply compared to the 1st quarter2).
- In Europe, 61.9% had a surprisingly positive turnover, with 56.6% exceeding expectations on net profit .
Having suspended business forecast announcements during the crisis, companies are once again sharing such communications, which in itself constitutes an encouraging factor.
There remains a measure of caution, however, with the fear of seeing the recovery run out of steam beyond an initial resurgence in activity. Indeed, unemployment rates look set to hamper the upturn in consumption over the medium term, particularly in the sectors most exposed to restrictive measures surrounding health such as tourism, catering and leisure. Although the worst of the crisis appears to be behind us, the economic calendar is delicate in the short term, with a potential second wave of the pandemic, the US elections, the return of tensions between China and the United States (Uighurs, tensions over technology stock, Hong Kong, etc.), and tensions in the Mediterranean between Turkey and a number of European countries. In the longer term, it will also be necessary to manage debt stocks, especially accumulated at State level, in response to the various recovery programmes introduced, but also by certain companies.
B. MARKETS STEADFASTLY IN GOOD SHAPE
For the time being, markets remain unaffected by these risks and are continuing the trend started in mid- March.
- On the US equity markets
- The MSCI World in Euro, although remaining negative since the beginning of the year, standing at -2.28% on 31 August, has recovered +37.89% from its low point of 23 March.
- The Nasdaq 100 in Euros posted an exceptional performance of +60.67% from its lowest point of 16 March, enabling it to post a performance over the year of +30.16%.
- On European equity markets,
- The CAC 40 also recorded a strong rebound, +31.76% since 18 March although the 2020 performance remains negative at -17.24%
- The Euro Stoxx also remains negative over 2020 at -12.62%, despite a recovery of +37.16% since 18 March.
- On the interest rate markets,
- US 10-year interest rates shrank by nearly 1.2 points, going from 1.91% to 0.69%, despite some pressure in August (+12 basis points).
- The same observation can be made with European interest rates: the German rate went from -0.19% to -0.39% (+12 basis points for August), the French rate from 0.12% to -0.09% (+10 basis points for August), the Portuguese rate from 0.44% to 0.42%, the Spanish rate from 0.47% to 0.40% and the Italian rate from 1.41% to 1.09%.
- On the credit markets,
- Risk premiums are tending to normalize after the very wide spread experienced during the crisis, while remaining at higher levels than at the beginning of January.
- Investment grade: Eurozone and US spreads stood at 92 and 151 respectively on August 31, compared with 63 and 112 at the beginning of January (after peaking at 199 and 389)4.
6 High Yield: at the global level, the spread increased from the beginning of January to the end of August from 335 to 477 (with a peak at 895), in the Eurozone from 268 to 403 (peak at 708), in the United States from 315 to 459 (peak at 887), in the emerging countries from 427 to 588 (peak at 1072)5.
6 Subordinated Debt: AT1/CoCos spreads have widened by 168 basis points since the beginning of the year (from 324 to 493, with a peak at 1898 on March 23), by 112 basis points for corporate hybrids and by 40 basis points for insurance subordinates6.
WHAT OPPORTUNITIES LIE IN STORE?
Attempting to gain a full understanding of all the changes brought about by the unprecedented health crisis seems premature. We can, however, already see some changes coming about:
- Technological transition: the pandemic has accelerated digitisation and the use of telecommuting. The need for IT tools has increased - something that has especially benefited US technology stocks.
- Changes in consumer patterns both in terms of transport, commerce and leisure. An acceleration of the transfer from physical commerce to e-commerce. Businesses will have to adapt quickly.
- An acceleration of the energy transition: Although some sectors may be tempted to abandon transition efforts to focus on recovery, we believe that on the contrary, any recovery should amplify this transformation under the impetus of the recovery plans that most governments are seeking to gear towards a sustainable economy.
In the shorter term, we consider that with the central bank stimulus plans and the better economic outlook than initially anticipated by forecasters (lower than expected default rates, better than expected earnings season, growth of States revised upwards), risky assets will remain particularly attractive to investors looking for yield in a context of persistently low interest rates, although certain episodes of volatility will have to be managed by the end of the year.
Investors' search for yield will be reinforced by the historic announcement of the Fed's change of "philosophy", announced by J. Powell at the Jackson Hole symposium at the end of August, favouring economic recovery over inflation control and thus keeping interest rates low.
1 Sources: Bloomberg, august 2020
2 Sources: Bloomberg, S&P 500, 31/08/2020
3 Sources: Bloomberg, Stoxx Europe 600, 31/08/2020
4 Sources: Bloomberg, BofAML, indices IG € (ER00), IG US (C0A0)
5 Sources: Bloomberg, BofAML, indices HY € (HE00), global (HW00), US (H0A0), Emergent (EMUH)
6 Sources : Bloomberg, Crédit Suisse, indices AT1 (CCEUTOBS index), Hybrids (ECHITOBS index), insurance subordinates(CICITOBS index)