Eurizon Asset Management published The Globe in August, the monthly publication on the Company's investment views updated at the end of July 2020. We publish a summary below, reminding the reader that this is not investment advice but only a vision on the possible trends of the various markets.
At the end of the article, the link to the video which illustrates the scenario expected by Eurizon for the international financial markets.
REFERENCE SCENARIO
The virus is confirmed to be accelerating in the USA, in
Latin America and other emerging countries, but it does not generate tensions
on the markets. The spread of contagion did not lead to new closures of economic activities and therefore did not cause new revisions to growth estimates. Furthermore, the search for a vaccine appears to be proceeding in a positive direction, even if there is no visibility on the timing of the experimentation.
IThe real offsetting news about the pandemic is economic data. Business confidence continued its recovery in July, confirming that April was the low for the world economy. Second-quarter corporate earnings fell sharply, but came in better than expectations, which were positioned too low. From here on out, it will be more difficult to beat a consensus that is adjusting upwards. The focus is on the actual re-acceleration of activity and this ultimately depends on the progress of the virus.
Among the supporting elements there are also the interventions of economic policy. Central banks have maxed out support and are now on standby. However, the fiscal stimulus continues. A new USD 1000 billion plan is under discussion in the USA. The positive momentum continues for Europe, with the agreement on the Recovery Fund, which can support the exit from the crisis and represents an important step forward for a more integrated EU
MACRO ECONOMY
The long wave of the virus in the USA has not led to new shutdowns of economic activity, but it is cause for attention. Without a return of the contagion, the return to normal activity will be slow.
June/July business confidence and second quarter corporate earnings beat overly pessimistic expectations. A V-shaped recovery is taking place for the global economy which, in order to continue, however, will need a return of the contagion.
ASSET ALLOCATION
A longer-than-expected spread of the virus does not appear to have the potential to interrupt the economic recovery, but it may delay it and reduce its intensity. Risk assets have come quite ahead in pricing the macro improvement.
The pro-cyclical profile of investment choices is partially reduced, taking profit on the overweight in shares.
FIXED INCOME
US and German government bonds are fully pricing in the recession and have potential to hedge against the volatility of risky assets. Furthermore, German bonds have a negative coupon flow.
Spreads down after the March crisis, but still interesting. Government bonds from the Eurozone periphery offer an interesting positive coupon flow against negative German rates. Investment Grade, High Yield and Emerging Markets bonds have high spreads compared to pre-Covid levels.
EQUITIES
Equities recovered around two-thirds of their March losses. The absolute evaluations appear stretched, but compared to a bond coupon flow stably close to zero, the remuneration offered by the shares appears interesting in the medium term.
The short-term trend appears tight, the economic recovery discounted by the stock exchanges could be slow without a return of the virus in the USA, August is a month seasonally subject to episodes of volatility.
CURRENCY
Efficient management of the contagion, decisive support from the ECB, agreement between governments on the Recovery Fund are elements of support for the euro, as opposed to the long wave of contagion in the USA and the uncertainties regarding the November elections which instead weaken the dollar.
The yen remains, together with US government bonds, one of the few assets capable of offsetting the volatility of risk assets.
VIDEO
Here the video lesson which presents the scenario expected by Eurizon for the international financial markets.
