April 2020: Market news and expert views - Union Investment ...
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“Sweeping monetary and fiscal
policy measures have played a key
part in stabilising the capital markets.
They are reducing systemic risk and
proving effective already as a pillar
of support for corporate bonds.”
Dr Frank Engels, Head of Portfolio Management
April 2020:
Market news and expert views
We work for your investmentApril 2020: Market news and expert views
The markets at a glance
Summary Economy, growth, inflation
We confirmed our neutral risk positioning (RoRo meter at In light of recent developments in connection with coronavirus,
level 3) once again. The equity weighting was increased slightly. our economists have made significant downward corrections to
Corporate bonds from issuers with good credit ratings and their growth forecasts. Public life has temporarily been suspended
government bonds from the eurozone periphery remain attractive in many industrialised economies (especially in Europe and the
in our opinion. We also take a positive view of the outlook for US) in order to stem the outbreak. However, this is likely to cause
precious metals. a sharp economic slump in the spring of 2020 (first and second
quarter). The support measures implemented by governments will
The broad range of monetary and fiscal policy measures being not really be able to prevent this, but should mitigate negative
taken will play an important part in tackling the economic conse- second-round effects. This should also prepare the ground for an
quences of the coronavirus pandemic. For the time being, they eventual recovery, which is likely to begin in 2021.
should be an effective means of stopping the turmoil in the real
economy from spilling over into the financial sector. Both the The gross domestic product (GDP) of the European Monetary
liquidity support and the lowering of solvency risks reduce the Union (EMU) can be expected to decline by 3.6 per cent in 2020
threats for the banking sector and thus ease financial market (previous estimate: growth at a rate of 0.8 per cent). Italy, the
stress and, by extension, systemic risk. This is an important country that is currently still reporting the highest infection levels
interim target in the fight to overcome this crisis and should outside China, is likely to be hit particularly hard. We also antici-
generally benefit risk assets. While these are necessary and pate a recession in Germany. We do not expect to see growth
important measures, we do not believe that they will be enough rates returning to positive territory until 2021. The US economy
to achieve the ultimate goal of a broad and lasting recovery. will probably suffer a further significant slowdown in the second
For that, we would need to see positive momentum in economic quarter of this year. Unlike Europe, which is highly dependent on
activity, which in turn requires a downward trend in new corona- global trade, the US economy depends more on domestic consumer
virus infections. And unfortunately, the latter does not seem to spending. Further containment measures expected to be imposed
be on the horizon yet. in the US could thus prove challenging as US households become
less and less willing to spend. However, US growth had been very
For the time being, we will thus continue to focus primarily on robust until recently. All in all, we therefore expect GDP to decline
(fixed-income) investments that benefit directly from the central by 1.9 per cent in 2020 (previous estimate: growth of 1.6 per cent).
banks’ support. Conditions have also improved for equities, The US economy should also see a return to growth in 2021.
although uncertainty in this asset class is even higher and will
have to be monitored very closely. With regard to the coming
weeks, how events will unfold in the US is particularly hard to
predict. We therefore continue to believe that trading conditions
in the capital markets are likely to remain turbulent in the near
term. But the medium- to long-term prospects are positive.
Measures taken by the German government Global recession still seems unavoidable
Year-on-year change in real GDP (%)
Liquidity support through KfW Economic stabilisation fund (WSF)
development bank l Support measures for large companies: 6
l Companies can apply for unlimited loans – Government guarantees for corporate bonds
5.6
l €449 billion loan facility for companies (bank and loans for a period of five years (€400 billion)
5.4
5.4
guarantees 90 per cent of the loan value for – Recapitalisation of companies (€100 billion) 4
companies with revenue of up to €50 million and – WSF designed to make up to €100 billion in
4.0
80 per cent of loan value for companies with loans available to KfW for special loan schemes
revenue of more than €50 million) 2
l No regulatory requirements for loans of State budget
0.8
0.7
0.4
1.6
≤ €3 million l Plans involve net borrowing
1.5
0.2
0.1
1.0
l Only a simplified credit check for loans of €156 billion 0
≤ €10 million l Additional investment worth €12 billion;
– 0.1
– 1.9
€7.8 billion for German hospitals
Changes to insolvency legislation –2
– 3.0
l Relaxation of rules regarding delays in filing Support programme for those affected by
– 3.6
for insolvency cuts in working hours:
l Easier access to allowances for workers affected –4
Direct grants for small businesses by reduced hours (currently approx. €25 billion 2020 2021 2020 2021 2020 2021 2020 2021
l €50 billion scheme for grants to help companies in unemployment insurance provisions)
cover fixed costs during forced closure US Eurozone China Japan
Banking supervision
l Suspension of the countercyclical capital buffer
n Old forecast n New forecast
Source: Union Investment, as at 24 March 2020. Source: Union Investment, as at 23 March 2020.
2April 2020: Market news and expert views
The markets at a glance
Monetary policy: US Federal Reserve goes ‘all in’ Bonds: Our preference remains for products that offer
risk premiums
Over the past few days, major central banks around the world have
adopted very aggressive measures at a record pace. On 23 March, The global spread of coronavirus and subsequent measures to
the US Federal Reserve announced new measures to support the contain the disease triggered a sell-off in the market for spread
financial markets. These include theoretically unlimited quantitative products as investors sought refuge in safe havens. With the
easing (QE), including corporate bond purchases, along with implementation of fiscal stimulus and monetary policy measures,
extensive support to ensure the flow of credit to the real economy. the corporate bond market should now bottom out. Extensive
At an emergency meeting, the Fed had previously already decided bond-buying programmes should counteract a widening of
to cut interest rates by 100 basis points and to expand its bond- spreads and increase liquidity in the sector substantially. On the
buying programme. other hand, these measures will also raise government debt
levels in the affected countries significantly. This is likely to bring an
The European Central Bank (ECB) also adopted a support package end to the fall in yields on Bunds at some point. Bonds from the
of historic proportions. Late on 18 March, the bank made the emerging markets (EM) and high-yield bonds are likely to benefit
surprise announcement that it would increase its purchases indirectly from the measures but are also subject to higher idiosyn-
of securities. An additional purchasing volume of €750 billion is cratic and economic risks. Many emerging economies do not have
planned under the new Pandemic Emergency Purchase Programme the financial means necessary to adopt large-scale economic
(PEPP). The ECB Governing Council emphasised that it would do support packages to mitigate the negative impact of coronavirus.
“everything necessary” and, if required, would adjust the size, Against this backdrop, active security selection is now particularly
duration and composition of the programme. It also said that it important in this asset class. All in all, we take a neutral view of
would explore all options to support the eurozone’s economy EM government bonds.
through the shock created by coronavirus.
Decision: Covered bonds have become less appealing compared
These two cases (along with similar events in the UK and many with other fixed-income securities. The duration signal for ten-year
other countries) demonstrate that the central banks are taking Bunds remains neutral.
swift and far-reaching action in response to the market turmoil
and thus reducing pressure within the financial system. This is Positioning: We take a slightly cautious approach to fixed-income
absolutely necessary in order to bring stability to the capital investments. Our preferences include government bonds from
markets (especially in the corporate bond segment) and also eurozone periphery countries and corporate bonds from issuers
creates the conditions that will help the economy to recover as with good credit ratings. We regard covered bonds as unappealing
quickly and robustly as possible. Combined with the sizeable fiscal and retain a neutral stance towards high-yield corporate bonds
emergency programmes implemented by a host of governments, and EM government bonds.
this action offers significant support for the financial sector and
the real economy, but all of this will still not be enough to bring
about a lasting turnaround in this crisis.
Central banks respond with interest-rate cuts and asset Central bank programmes curb rise in spreads
purchase programmes Swap spreads (basis points)
Total assets on the Fed’s balance sheet (US$ billion)
5,000 1,000
4,500 1,362
800
4,000
3,500 600
3,000 400
2,500
200
2,000
1,500 0
2017 2018 2019 2020 2000 2004 2008 2012 2016 2020
n Long-dated US Treasuries n Treasury bills n Other positions n Investment-grade bonds n High-yield bonds n Subordinated bonds
Sources: Bloomberg, Union Investment, as at 23 March 2020. Sources: Bloomberg, Refinitiv, Union Investment, as at 23 March 2020.
3April 2020: Market news and expert views
The markets at a glance
Equities: Slight preference for equities from Commodities: Mine closures in South Africa
industrialised countries
Our overall view of the commodities markets remains neutral.
Sweeping actions taken by governments and central banks have Within the asset class, precious metals are among our favourites.
halted the sell-off in the equity markets and initial signs of a Gold recently came under pressure despite its status as a safe
turnaround are emerging. In recent days, the pressure had haven. This was because precious metals were easier to liquidate
originated primarily from the fixed-income side. When investors than other asset classes and thus experienced a sell-off in the
become concerned that companies might not be able to obtain crisis. The stabilisation in the corporate bond markets should help
funding in the capital markets, they tend to sell equities at scale. to ease the selling pressure in this segment. The derivatives
The measures that have now been adopted provide much-needed markets should also be safe from further forced selling in response
reassurance for companies. As a result, share prices rallied to margin calls. Real interest rates in the US are also falling again,
immediately after the announcement by the US Federal Reserve. which should create an added tailwind. In addition, South Africa
Volatility remains high, but has started to reduce. has now also suspended economic activities to a large extent
and has closed all mines for the time being to fight the spread
However, it is still too early to sound the all-clear, especially as of coronavirus. As South Africa is the world’s largest producer
the number of new COVID-19 infections is still rising rapidly in of gold and platinum, market supply should fall significantly.
most industrialised countries and it is not yet possible to predict In addition, there is currently very high demand for physical gold
how long the containment measures imposed by governments (coins and bullion).
will have to be maintained. These conditions also make it all but
impossible to gauge the impact of the coronavirus crisis on The oil market is still recording significant excess supply. We expect
companies’ revenues and profits. Investors will mainly be looking that all participants will continue to produce high volumes in their
towards the US in this regard. Nevertheless, justified hopes of battle for market share. But at the current price levels, continuing
increasing stability are returning to the equity markets thanks production will probably become too unattractive for certain
to the fiscal and monetary policy stimulus measures. The stock producers in the medium term. The adjustment process is likely
markets will remain volatile in the near term, but equities remain to take some time. Going forward, industrial metals could become
attractive on a medium-term horizon. Still, we will probably not see more attractive again once economic activity in China returns to
widespread buy signals until the number of new infections starts much higher levels. At this point in time, though, production in
to fall and there is a noticeable stabilisation of economic data, China is only just restarting and inventory levels for many industrial
at least in terms of a slowing in the rate of decline. For now, the metals remain high, so it is still too early for this to happen.
collapse in economic data is yet to come – especially in the US.
• Decision: Precious metals have regained appeal.
• Decision: We are returning to a slightly more optimistic view • Positioning: The overall weighting of commodities remains
of equities from industrialised countries but maintain a neutral neutral.
stance towards EM equities.
• Positioning: Sight preference for equities overall.
Spread of coronavirus weighs on share prices – Gold intermittently lost its status as a safe haven
earnings follow suit Price per troy ounce of gold (US dollars)
STOXX 600, earnings per share, indexed
25 16 1,700
20 15
1,650
15 14 Gold serves as
a safe haven
1,600
10 13
5 12 1,550
Sell-off to obtain
0 11 liquidity
1,500
–5 10
1,450
2016 2017 2018 2019 2020
Oct Nov Dec Jan Feb Mar
n Price/earnings ratio (right-hand axis) n Earnings per share (%, left-hand axis) 2019 2019 2019 2020 2020 2020
Sources: Bloomberg, Union Investment, as at 23 March 2020. Source: Bloomberg; as at 24 March 2020.
4April 2020: Market news and expert views
The markets at a glance
Currencies: Pound sterling weakens substantially Potential impact of coronavirus on individual
real-estate segments
Pound sterling depreciated steeply against the euro as a result of
the UK government’s lax approach to the coronavirus crisis. A few The global spread of coronavirus has caused significant disrup-
weeks ago, there had been hopes of a post-Brexit fiscal stimulus tion in economic activity. Due to market inertia and limited
package. But at present, the currency market, too, is dominated availability of data, there will be something of a time lag before
by coronavirus-related news. Compared with other countries, certain implications for the real-estate market start to become
containment measures in the UK are still very limited. A much- clear, but there are trends emerging in the market already that
needed fiscal support package like those adopted in many other will need to be closely monitored.
industrialised economies will drive up public debt and is currently
putting downward pressure on pound sterling. We will therefore The sectors that suffered the most immediate and, based on current
retain our wait-and-see approach. data, also the most severe damage are hotel and retail businesses.
Hotels and shopping centres will have to brace themselves for
The same applies for the US dollar. The anticipated large-scale significant falls in revenue over the course of the year, although the
package of measures to support the economy will leave a huge hole hotel sector is likely to bounce back quickly once the coronavirus
in the US federal budget and will probably weaken the US dollar in crisis abates, because travel destinations will be back in demand
future. With an almost inconceivable volume of US$ 2 trillion, this and postponed events will be rescheduled. In the retail sector, the
stimulus package is equivalent to a third of the annual output impact will differ from industry to industry. Willingness to invest in
of the US economy and will lead to a budget deficit of 15 per cent. capital assets or products of long-term use is inevitably weakening
As a result, the dollar should depreciate against the euro going or being curtailed by widespread forced store closures. But to
forward. But demand for the currency was recently strong as many some extent, this sector will also see catch-up effects. By contrast,
issuers were taking out debt in US dollars. We expect that volatility e-commerce businesses, food retailers and pharmacies are currently
will remain high and are taking position on the sidelines for the recording a boost in sales.
time being.
Part of the logistics sector is also benefiting from increased demand
Many emerging markets will probably also experience high volatility for storage space from online retailers, and from a growing tendency
in their currencies. Most of these countries only have limited scope towards warehousing. In the office market, lease decisions are
for fiscal stimulus measures and are therefore less able to defend likely to be postponed due to the prevailing uncertainty about
themselves against the adverse consequences of coronavirus. It is economic prospects and planned expansions could be put on hold
likely that this will have an impact on exchange rates. temporarily. But such plans are likely to be resumed as soon as
a recovery is on the horizon.
• Positioning: Neutral and unchanged.
Transactions in the real-estate investment market are also likely to
be delayed amid heightened uncertainty and potential challenges
Lax approach to the coronavirus crisis not well received for contractual partners due to travel restrictions. In a small number
by the market of cases, purchase offers have been withdrawn. At the moment, we
Euro in pound sterling are not seeing fire sales, i.e. hasty selling under pressure. On the
contrary: Irrespective of the coronavirus crisis, a few structured
0.96
Coronavirus bidding processes are even going ahead as planned. So far, the
0.94 reaches the UK
international property markets have recorded neither markdowns
0.92 in prices nor a build-up in supply.
Hopes of a post-Brexit
0.90 fiscal stimulus package
The future trajectory of the economy and, by extension, the scale
0.88 of the disruption in the international real-estate markets currently
0.86 depend on the success of the measures to contain the spread of
COVID-19 and on how long these will have to be maintained
0.84
before restrictions can be relaxed or lifted. At present, it is still too
0.82 early for a conclusive assessment. Much will also depend on
Oct Nov Dec Jan Feb Mar whether the rescue packages adopted by individual countries
2019 2019 2019 2020 2020 2020
prove effective and whether rent deferrals and other support
Source: Bloomberg; as at 25 March 2020. measures will really help tenants to remain solvent and in business.
5April 2020: Market news and expert views
Our assessment at a glance
Our current risk assessment RoRo meter
• The coronavirus pandemic and the containment measures 3
taken in response to it will cause a sharp economic slump. 2 4
Support packages adopted by governments will not prevent
this, but should mitigate adverse effects.
1 5
• The central banks have taken swift and far-reaching action
to reduce the level of stress in the financial system. This should Risk Risk
have a calming effect and prepare the ground for an eventual Off On
R o Ro r
recovery. - Mete
• However, it is still too early to sound the all-clear as new
infections continue to rise rapidly. Source: Union Investment, as at 24 March 2020. Last changed (from 4 to 3) on 27 January 2020.
• Our general risk assessment (RoRo meter) remains at level 3 Note: The investment strategy is established by first closely analysing the market environ-
(neutral). ment. The result is reflected in a risk rating. For this, the Union Investment Committee (UIC)
expresses a risk-on/risk-off decision at one of five levels (1, 2, 3, 4 or 5). It is to be inter-
preted as follows: a ‘5’ indicates a strong appetite for risk while a ‘1’ indicates a general
withdrawal from risk assets.
Our view of the asset classes Appeal of different asset classes
• Bonds: The measures adopted by the central banks should Bonds
prevent spreads on corporate bonds from widening further. Eurozone core government bonds
Paper from the eurozone periphery is also well-supported Covered bonds
by the asset purchase programmes. Eurozone periphery government bonds
• Equities: The actions taken by governments and central banks Investment-grade euro corporate bonds
have halted the sell-off. Volatility remains high, but has started
High-yield euro corporate bonds
to reduce. Now is an opportune time to establish initial positions
Emerging market government bonds
in equities from industrialised countries.
• Currencies: The coronavirus pandemic is also having an Equities
impact on individual currency pairs. Interdependencies between Industrialised countries
currencies can be highly complex, so we would advise against Emerging markets
taking a specific position. Commodities
• Commodities: The selling pressure on gold should ease. Currencies
We expect to see a fall in real interest rates in the US. US dollar
Supply should furthermore diminish due to mine closures
Pound sterling
in South Africa.
• The situation in the money markets remains unchanged. Japanese yen
Interest rates remain in negative territory, which means that Emerging market currencies
holding cash is not a good idea. Absolute return
• Absolute return strategies are rated neutrally in a multi- Cash
asset context. Source: Union Investment, as at 24 March 2020.
• Due to the coronavirus crisis, it is currently impossible to offer
Note: The table above shows a relative view of a multi-asset portfolio (exclud-
a detailed outlook by region for the real-estate market. ing real estate). If an asset class is more strongly favoured, a lower level of invest-
ment in another asset class is required in return. The latter would then be classified as
less favoured – or vice versa. Real estate is excluded from this analysis.
Real estate
The signs indicate the change compared with the decision made at the UIC’s previous
regular meeting. Germany
Europe (ex Germany)
Not favoured Strongly favoured
Neutral US
Asia-Pacific
Source: Union Investment, as at 25 March 2020.
Note: The table above provides a relative view of the office real-estate markets
in light of current market prospects. Due to a lack of more frequently available data,
it is only updated every six months.
6April 2020: Market news and expert views
Disclaimer
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The information contained in this document should not
be considered as an offer, or solicitation, to deal in any of
the funds mentioned herein, by anyone in any jurisdiction
in which such offer or solicitation would be unlawful or in
which the person making such offer or solicitation is not
qualified to do so or to anyone to whom it is unlawful to
make such offer or solicitation.
This document does not constitute a recommendation to
act and does not substitute the personal investment advice
of a bank or any other suitable financial services consultant
or specialist in taxation or legal advice. The descriptions
and explanations are based on our own assessments and
are limited to the facts at the time of the preparation of
this document. This applies in particular also as regards the
present legal and taxation environment, which may, at any
time, change without advance notice.
This document was prepared with due care and to the
best of knowledge of Union Investment Institutional
GmbH, Frankfurt/Main, Germany. Nevertheless, the
information originating from third parties was not
verified. Union Investment Institutional GmbH cannot
guarantee that the document is up to date, accurate
or complete.
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Information on the performance of Union Investment
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Past performance is no guarantee for future returns and
there is no guarantee that invested capital may be
returned.
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explanations are dated 27 March 2020.
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