May 2020: Market news and expert views
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“First signs of success in the fight
against coronavirus are creating scope
for the careful easing of lockdown
measures. This should provide a boost,
especially for the equity markets.”
Max Holzer, Head of Relative Return
May 2020:
Market news and expert views
We work for your investmentMay 2020: Market news and expert views
The markets at a glance
Summary Economy, growth, inflation
We are seeing the first signs of success in the global fight against The economic fallout of the pandemic is becoming increasingly
the spread of coronavirus. The number of new infections appears to evident. Last week, China was the first large country affected by
be falling, particularly in developed countries in Europe and North the outbreak to publish its gross domestic product (GDP) figures
America. If this trend is confirmed, there will be further leeway to for the first quarter of 2020. Its GDP was even lower than antici-
reopen the economies of these countries, which are very important pated, falling by a sobering 6.8 per cent compared with the
to the global economy. This improvement is needed in order to prior-year period. There is cause for concern that growth in other
underpin a sustained economic recovery and to consolidate the regions might also have slowed down more severely than originally
incipient upward trend in prices of risk assets. Although we take estimated.
the latest figures as an encouraging sign that things are moving
in the right direction, we believe that the situation remains very Our economists have therefore downgraded their forecasts.
precarious. There are two main reasons for this. Firstly, the lockdown took
a greater toll on the economy in the first quarter than had been
Against this backdrop, we have confirmed our neutral risk expected. Although strict containment measures in the US were
positioning (RoRo meter at level 3) but have made adjustments only imposed in mid-March, both industrial output and retail sales
within and between individual asset classes. In the past, the plunged last month. The decline in production levels was, in fact,
post-crisis recovery of the capital markets has usually followed the steepest single-month fall since February 1946. Secondly, the
a particular pattern. The first to benefit are usually the less risky gradual easing of restrictions is likely to take place later than
risk assets, such as corporate bonds issued by investment-grade previously assumed.
borrowers, followed by equities and then, at a later stage, com-
modities. The latest analysis indicates that this blueprint will also All in all, we expect US GDP to decline by 6.0 per cent in 2020. For
apply to the coronavirus crisis. We are therefore taking an even the eurozone, our economists predict a fall in GDP of 6.5 per cent,
more favourable view of corporate bonds. Conversely, we are while Germany’s GDP is expected to decrease by 5.4 per cent.
returning to a neutral view of government bonds of eurozone These estimates are largely in tune with the general consensus.
periphery countries. Although these countries are benefiting from But according to our calculations, the recovery will probably take
the steps taken by the European Central Bank (ECB), they are longer than expected by the majority of analysts. This will also
affected by the pandemic – severely in some cases – and have have an impact on inflation. As a result, our inflation predictions
few fiscal policy options. for the next two years have been lowered as well.
On the equity side, we are now also favouring stocks from the
emerging markets. Both the regional composition (high proportion
of Asian securities) and the sectoral composition (significant
percentage of IT firms) played a key part in this decision, especially
as these markets have benefited little from the recovery so far.
US opts for direct government spending, Germany A sharper slowdown in the short term, but also a brighter
focuses on loan guarantees outlook for 2021
Percentage of GDP Year-on-year change in real GDP (%)
20 12
16 8
17.7
8.9
15.4
15.2
14.2
12 4
5.4
2.5
2.5
1.9
12.7
12.4
12.1
4.0
11.5
11.1
0.4
0.1
10.5
8 0
8.0
6.7
–4
– 1.9
4
– 6.0
– 6.5
– 3.6
2.1
1.5
1.4
1.4
1.2
1.1
0.8
2.3
3.1
0.4
0 –8
US Japan Germany UK France Italy 2020 2021 2020 2021 2020 2021
US Eurozone China
n Total n Thereof loan guarantees n Thereof government spending
n Other measures n Old forecast n New forecast
Sources: Center for Strategic and International Studies, Union Investment, as at 21 April 2020. Source: Union Investment, as at 21 April 2020.
2May 2020: Market news and expert views
The markets at a glance
Monetary policy: central banks are buying bonds Fixed income: continued preference for corporate bonds
Following the decisions made in March, the world’s major central Following the sharp rise in yields across all fixed-income segments
banks have now begun to prop up the markets by buying bonds. in mid-March, the situation has eased again somewhat in recent
In consequence, their balance sheets have expanded significantly. weeks, partly thanks to the measures taken by the central banks.
The US Federal Reserve (Fed), for example, increased its balance Yields on safe-haven paper are falling again, as are the spreads on
sheet by 50 per cent within one month. This is already more than corporate bonds. The severe recessions triggered by the coronavirus
it bought over many months during the financial crisis. Shortly pandemic in Italy and Spain will lead to an even more significant
before Easter, the Fed expanded its programmes to include high- increase in government debt than had been anticipated just a few
yield bonds and loans to small and medium-sized enterprises. weeks ago. This will weigh heavily on bonds from the eurozone
periphery. Europe has not come up with a response to this problem
After adopting extensive measures in March, the ECB did not so far and has not presented a united front, thereby adding to the
introduce further steps. It too has significantly extended its uncertainty.
purchase programme, heading off a further rise in risk premiums
for the time being. In the corporate bond segment, the down- The group of the 20 largest industrialised countries and emerging
ward trend in spreads is continuing. However, the debate around markets (G20) has adopted a debt moratorium on bilateral loans
the funding of state aid in the eurozone periphery countries to countries that receive state development aid. The group is
and the refusal of some northern European countries to consider calling for similar measures in relation to government bonds of
a mutualisation of debt at EU level (‘coronavirus bonds’) has led the world’s poorest countries. Spreads on emerging market sover-
to a renewed increase in risk premiums for periphery bonds in eign debt denominated in hard currency have risen overall as the
recent weeks. All in all, the central banks have taken swift and entire market is being pulled down as a result of the payment
far-reaching action in response to the market turmoil and have problems being experienced in the very weak countries. For certain
reduced the level of stress in the financial system. Combined with economies, debt relief could generate opportunities. Careful
the sizeable fiscal emergency programmes implemented by a host security selection will be paramount in this regard. However, most
of governments, this action offers significant support for the of the affected countries do not qualify as viable investment
financial sector and the real economy, but all of this will still not options for us.
be enough to bring about a lasting turnaround in this crisis.
• Decision: We take an even more favourable view of corporate
bonds from issuers with good credit ratings but a neutral view
of government bonds from the eurozone periphery.
• Positioning: Overall, we remain slightly cautious about
fixed-income investments in the portfolio. In our opinion,
government bonds from eurozone core countries have limited
appeal and covered bonds are very unattractive. We are taking
a position on the sidelines in respect of government bonds from
the eurozone periphery, high-yield corporate bonds and EM
government bonds. Corporate bonds are our clear favourite.
The volume of securities on the Fed’s balance sheet is Increase in credit spreads halted
growing rapidly Swap spreads (basis points)
Volume (US$ billion)
800 350 800
6,000 700 250 700
600
150 500
5,000 600
50 400
500 9 March 23 March 6 April 20 April
4,000
400
3,000 300
200
2,000
100
1,000 0
2018 2019 2020
0
2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 n Investment-grade n Subordinated n High-yield
Source: Bloomberg, as at 21 April 2020. Sources: Bloomberg, Refinitiv, Union Investment, as at 21 April 2020.
3May 2020: Market news and expert views
The markets at a glance
Equities: slight preference for EM equities Commodities: slight overall reduction in risk
The equity markets have picked up on signals in recent macro- Recent events have triggered a price collapse of historic propor-
economic data and have embarked on a rally. The decline in the tions in the oil market. The price of WTI oil even dropped deep
numbers of new infections has raised hopes of a further easing into negative territory for a short period. In the coming weeks,
of lockdown measures. Nevertheless, many companies have been the oil market will probably remain volatile. The cuts in output
hit hard by the lockdown and profit expectations are falling on by the OPEC+ countries have done nothing to calm the nerves of
an unprecedented scale. Both profit forecasts and price trends investors as they barely scratch the surface compared with the
are showing a high level of dispersion between sectors. The energy massive drop in demand. Many producers have no other option
sector and equities from the travel industry remain under pressure. but to fill up their storage facilities. But remaining capacity is
Healthcare sector stocks, on the other hand, are among the main dwindling. We expect that storage facilities will be full within the
beneficiaries of this crisis. Equities from companies with particular next few weeks. But limited storage capacity means that the huge
business models (delivery services, video conference technology, market surplus will not last for long. The market will find its
online retail, etc.) are also highly sought-after at present. Amazon equilibrium in the coming weeks, either through further produc-
shares, for example, recently climbed to an all-time high. tion cuts or due to stronger demand, or a combination of both.
Oil prices will remain extremely volatile in the coming weeks. More
We anticipate that the equity markets will remain supported in the than ever, they will depend on what type of oil can be delivered
short term as a result of the lifting of restrictions. This raises the and to where. We believe that US oil prices remain at particular risk
appeal of equity investments in our opinion. In addition to equities in the short term, because the market-driven nature of the US
from industrialised countries, we now also favour stocks from the oil industry means that the pressure to adjust is mainly applied
emerging markets. China, Taiwan and South Korea, all of which are through the pricing mechanism. The Brent market appears to be
some way ahead in overcoming the crisis, are strongly represented better supported, as it has a broader (physical) base and the cuts
in the MSCI Emerging Markets index. In addition, the IT sector made by OPEC+ have a more direct impact. In the second half of
– another notable winner from the crisis – also features heavily the year, there is even the prospect of a shortfall.
in the index.
Industrial metals are continuing to benefit from the restart of
• Decision: We now also favour equities from the emerging economic activity in China. Gold is supported by falling real
markets. interest rates, but its price has already risen sharply.
• Positioning: Equities thus remain attractive. This applies to
stocks from industrialised countries and from emerging • Decision: Precious and industrial metals are losing their
markets. appeal, as are energy commodities.
• Positioning: We are cautious about commodities overall.
Equity markets recovering after coronavirus shock Unprecedented movement in US oil prices
Performance of selected equity markets (%) Price of a barrel of WTI oil (US$)
30 80
20
60
22.3
21.4
7.9
10
17.0
16.5
4.8
4.1
15.3
3.2
1.3
0.9
0.8
0 40
– 14.9
– 10 20
– 27.8
– 20
– 30.7
– 33.9
0
– 38.3
– 38.8
– 30
– 40 –20
Germany Eurozone US Japan China Emerging
–40
markets
Jan Mar May Sep Nov Jan Mar
n 1 January until ‘February high’ n Correction n ‘March low’ until 21 April 2019 2019 2019 2019 2019 2020 2020
Source: Refinitiv, as at 21 April 2020. Source: Bloomberg, as at 22 April 2020.
4May 2020: Market news and expert views
The markets at a glance
Currencies: US dollar loses its tailwind The office market in Germany
The currency markets have also started to experience a reduced Over the past twelve months, Germany’s top-five real estate
level of volatility in recent weeks. Governments’ extensive pack- hotspots – Berlin, Düsseldorf, Frankfurt, Hamburg and Munich
ages of measures aimed at stabilising the economy are squeezing – continued to see strong demand for office space. Although there
national budgets everywhere. The US dollar has lost the tailwind of was a small year-on-year decrease in lettings, this was mainly due
relatively high interest rates following the Fed’s rate cuts. The euro, to the very short supply of available properties. The average vacancy
on the other hand, is being weighed down by the political debate rate for these five German cities was just 3.7 per cent at the end
surrounding the issue of ‘coronavirus bonds’. Countries on the of the first quarter of 2020, the lowest level since the end of
eurozone periphery are pushing hard for this solution so that they 2001. Berlin registered the lowest vacancy rate at 1.9 per cent.
do not have to raise their already high debt levels, but northern The strong demand and lack of supply pushed up office rents by
European countries (including Germany and the Netherlands) are an average of 4.4 per cent year on year across the top-five German
sceptical about the concept of jointly issued debt – just as they office markets. At 8.8 per cent, Berlin recorded the highest rise
were during the euro crisis. The countries of the eurozone are in rents.
therefore unlikely to reach agreement quickly.
At the end of the first quarter of 2020, the global spread of corona-
The general downward trend for EM currencies was brought to virus caused significant disruption to economic activity. It is not
a halt. However, the currencies of commodity-producing countries yet possible to predict the full human and economic cost and
and those with deteriorating creditworthiness continued to come consequences. Experience shows that there tends to be a time lag
under pressure. South Africa’s credit rating downgrade, for example, before property markets react to this type of shock. It is therefore
caused the value of the rand to fall. By contrast, other emerging still too early to make reliable forecasts for the investment and
market currencies rallied quickly, particularly in Asia. Countries rental markets.
there are further ahead in terms of tackling the pandemic and are
relaxing the measures that they had introduced to contain the virus. The office market usually reacts to economic turmoil. In this
segment too, the anticipated recession will result in defaults on
• Positioning: Neutral and unchanged. rental payments or even the loss of some tenants. Demand for
office space will weaken on the whole, as lease decisions will be
postponed due to the uncertainty about economic prospects and
expansion plans could be put on hold temporarily. However, the
effect of this will be mitigated by the currently high occupancy
rates and a modest level of new construction.
South Africa’s rand depreciates The office segment is also benefiting as a result of many employees
South African rand to the euro over the past twelve months being able to continue to do their jobs by working from home.
Most offices remain open and can be accessed. For safety rea-
21
sons, however, they are often only used by employees who need
20 to be there to carry out important technical or organisational
19 tasks. The greater use of digital infrastructure at present may
accelerate the digitalisation trend, thereby providing a particular
18
boost for companies in the IT sector.
17
16
15
Apr Jun Aug Oct Dec Feb Apr
2019 2019 2019 2019 2019 2020 2020
Source: Bloomberg, as at 22 April 2020.
5May 2020: Market news and expert views
Our assessment at a glance
Our current risk assessment RoRo meter
• Signs of initial progress in the fight against coronavirus are 3
emerging. 2 4
• Confirmation of the trend will provide scope for easing
lockdown measures. This will be essential for any economic
1 5
recovery.
• However, the immediate impact of the recently extended Risk Risk
containment measures in Europe and the US will be a sharp Off On
R o Ro r
drop in GDP of at least 6 per cent. - Mete
• The major central banks’ extensive purchase programmes are
proving to be supportive. Source: Union Investment, as at 21 April 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
• Fixed income: Corporate bonds continue to be well supported Fixed income
by the central banks’ purchase programmes. Given the debate Eurozone core government bonds
about higher government debt in Italy and about ‘coronavirus Covered bonds
bonds’, we are now slightly more cautious about paper from Eurozone periphery government bonds
eurozone periphery countries. Investment-grade euro corporate bonds
• Equities: The stock markets should benefit as lockdown
High-yield euro corporate bonds
measures are eased. Asia has made the most progress in this
Emerging market government bonds
regard, which is why shares from emerging markets are
Equities
becoming increasingly attractive.
• Currencies: The coronavirus pandemic is also having an Industrialised countries
impact on individual currency pairs. Interdependencies between Emerging markets
currencies can be highly complex, so we would advise against Commodities
taking a specific position. Currencies
• Commodities: The oil market is still recording significant US dollar
excess supply despite the cuts to production. Prices will con-
Pound sterling
tinue to come under downward pressure in the short term.
Japanese yen
Industrial metals should benefit from the restart of economic
activity in Asia. Emerging market currencies
• The situation in the money markets remains unchanged. Absolute return
Interest rates remain in negative territory, which means that Cash
holding cash is not a good idea. Source: Union Investment, as at 21 April 2020.
• Absolute return strategies are rated neutrally in a multi-
Note: The table above shows a relative view of a multi-asset portfolio (exclud-
asset context. ing real estate). If an asset class is more strongly favoured, a lower level of invest-
• Due to the coronavirus crisis, it is currently impossible to offer ment in another asset class is required in return. The latter would then be classified as
a detailed outlook by region for real estate. less favoured – or vice versa. Real estate is excluded from this analysis.
Real estate
The signs indicate the change compared with the UIC’s previous decision.
Germany
Not favoured Strongly favoured
Europe (ex Germany)
Neutral
US
Asia-Pacific
Source: Union Investment, as at 21 April 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.
6May 2020: Market news and expert views
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