29th June 2020

Solid as a rock

Dr Yves Wagner, Executive Vice President of BCEE Asset Management, discusses the context in which the asset management business has been operating for the last three months.

What can you tell us about the changes in the economic landscape in these unprecedented times?

It’s no secret that the global economy is buckling under the weight of the adverse impacts stemming from the Covid-19 pandemic. The shock is twofold: the virus spread and wreaked havoc so quickly that most leaders around the world were forced to impose lockdown measures.

After this, the supply shock was negative, causing production to collapse, and the demand shock was also in the red, as consumption and investment both plummeted. It is this twin shock that pushed the economy into the deepest recession the world has seen since the Crash of 1929.

The macroeconomic indicators published during lockdown are abysmal: in the US, GDP contracted by 4.8%; the unemployment rate literally exploded, with 30 million additional job-seekers; industrial output contracted by 5% in March and 11% in April; and confidence indicators collapsed to all-time lows. The picture is no rosier in Europe, and some of the data are chilling, such as passenger car sales, which plunged by 76.3% across the European Union. The GDP trend is identical to that of the US: initial estimates show negative 3.3% growth for the eurozone year-on-year at the end of the first quarter.

And while the EU is doing well on the jobs front, with the unemployment rate stable at 7.3%, we should bear in mind that, for the time being, we are seeing only the tip of the iceberg.
Dr. Yves Wagner - Directeur, BCEE Asset Management

Exactly, so what should we expect?

That's a very direct question with an equally complicated answer.

Because if there is one point that the international institutions are stressing, be they the International Monetary Fund (IMF) or the European Commission, it is the extremely unpredictable nature of the situation in which the global economy finds itself. This atmosphere of uncertainty, if it persists, will, of course, impede the recovery: an economic environment in which confidence is lacking encourages neither consumption nor investment, whether we put ourselves in the shoes of households or corporations.

In contrast, if we look at this from a glass-half-full perspective, we can see that this crisis is exceptional in that the stance of the public authorities, both governments and central banks, has ostensibly been as proactive as their support for the economy has been unconditional. And this has not always been the case in previous crises.

What does this mean in concrete terms?

It means that governments and central banks around the world have coordinated their efforts so as to roll out a staggering arsenal of measures intended to support the economy. The first example is the action taken by the European Central Bank (ECB), which initially strengthened its asset purchase programme by increasing it by EUR 120 billion for the year and stepping up its TLTRO programme.

While this first intervention was not enough to soothe investors, the second, in contrast, had the desired effect: the ECB announced that it would make additional purchases worth EUR 750 billion under its asset purchase programme. The US Federal Reserve (Fed), meanwhile, made a splash from the start, cutting its key rates twice and announcing that it would buy at least USD 500 billion in US Treasuries and USD 200 billion in mortgage-backed securities.

And that’s not all: the institution pledged to pursue its unlimited quantitative easing (QE) programme and Congress passed the CARES Act (a USD 2,000 billion economic stimulus through direct payments to taxpayers and stimulus measures for businesses), which is likely to be further strengthened, as the institution revealed that it would buy as many US Treasuries as necessary, in addition to the mortgage-backed securities, in an effort to support the fixed income market and keep it operating effectively.

How have the equity markets performed?

Over the last three months, ups and downs have been the rule rather than the exception: with the threat of recession looming and investors demoralised, the equity markets found themselves entering a fast and sharp correction phase, with all the attendant volatility: the major US indices and their European equivalents have lost 30%-35% and 35%-40%, respectively. The time had therefore come for the joint action by the central banks and governments which we have already described in detail, with the aim of relieving investors’ anxiety. And it has paid off in the last two months: market sentiment has clearly improved thanks to economic stimuli.

The Tech sector saw the most spectacular rebound: the Nasdaq, the tech stock index, served as a safe space, with investors clearly taking positions in high-quality stocks that are often viewed as growth stocks that are well positioned to benefit from secular trends. These securities have strong growth outlooks for both sales and margins, have kept their debt under control, and are on strong enough footing to self-finance and fund inorganic growth projects that provide a return to investors.

How has your positioning evolved under these circumstances?

We remain particularly cautious and vigilant because we are well aware that the pandemic will leave its mark on the economy.

Also, while we are tracking the rebound, we are not chasing it at any cost: we believe that we still have a ways to go as the strong results in the latest quarterly releases do not yet reflect the reality of the situation.

However, it's no secret that every complex situation presents opportunities.
On the bond side
On the bond side
On the bond side, we remain neutral on the duration of our euro portfolios and also remain neutral on the US yield curve as we believe the Fed will seek to keep the cost of public debt low to support the government’s budgetary needs. Our view of European credit remains unchanged and, with the US credit market bouncing back, we also maintain our positive view on high-quality corporate debt.
On the equity side
On the equity side
On the equity side, we take a neutral stance and favour defensive sectors and stocks. The stock market period we recently experienced is likely to offer some nice medium- or even long-term opportunities in specific sectors or assets that suffered as a result of a potentially complex situation in the short term.
In sector terms
In sector terms
In practice, in sector terms we favour Communication Services and Healthcare, and are increasing our exposure to Utilities.

To summarise, public authorities around the world have raced to show their leadership by taking drastic, extremely well-publicised measures to send a clear message: the institutions are rock-solid and everything is under control. This meant dealing with the most pressing issues first. Efforts must now turn to restoring momentum and forging balanced economies. It’s an enormous challenge, and the next crisis on the horizon, the debt crisis, is not likely to reassure investors or consumers.


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