Early signs of bottoming but headwinds remain

The efficacy of lockdown measures, strong policy support, easing of liquidity constraints and cheaper market valuations help set the stage for the start of a bottoming process, which can historically last for several months.

Apr 2020 | 3.5 min read

As the coronavirus spreads across the world, the global health crisis has morphed into challenges for both the global economy and financial markets.

Global activity has collapsed dramatically in the last 2 months, following the lockdowns in multiple countries. Equities fell across both developed and emerging markets and analysts have revised earnings expectations lower. High quality USD assets outperformed on the back of safe haven flows and the strong USD further weighed on emerging market assets. Liquidity tightened across all asset classes, with the US and Asian high yield bond markets among the worst affected as default fears spike.

Thanks for subscribing!

Follow us :

Signs of hope

Amid the uncertainty over the duration of the lockdowns, impact on economies and potential exit strategies, we see the following signs of hope:

Efficacy of lockdown measures

Containment measures, if implemented properly, can get the outbreak under control. We have seen fatalities plateau in Spain and Italy to date.

China has shown that aggressive lockdown measures can work and will allow business sentiment to rebound when normality resumes. China’s Official NBS Manufacturing PMI surged to 52.0 in March 2020 from a record low of 35.7 in the previous month, as many companies resumed operations. Its non-manufacturing Purchasing Managers’ Index rebounded to 51.8, up 21.7 points from February with expansions seen in the transportation, retail sales and banking sectors.

Strong policy support

Policymakers, armed with the lessons from 2008, have moved quickly to prevent a financial crisis from developing. The Federal Reserve (Fed) has cut rates, restarted quantitative easing, extended swap lines and more recently, resurrected the Commercial Paper Funding Facility (CPFF). A smooth functioning of the commercial paper market, which supplies credit for auto loans, mortgages and to companies, will help support families, businesses and jobs.

In the US and Europe, fiscal stimulus has amounted to 10% of GDP and 5% of GDP respectively. The fiscal stimulus provided to date in many countries exceeds what was provided during the Global Financial Crisis (barring China). See Fig. 1. Asian policymakers too have also responded with aggressive monetary easing and fiscal stimulus, with the latter ranging between 0.2% and 10% of respective country’s GDP. Within Asia, Japan stands out with its recent announcement of a huge fiscal package amounting to almost 20% of GDP.

Fig. 1. Global fiscal stimulus exceeds 20081

early-signs-of-bottoming-but-headwinds-remain-chart-01

Improved liquidity conditions

The powerful combination of fiscal and monetary policy responses globally has eased liquidity conditions across the markets. We have seen commercial paper borrowing yields fall, the costs for overseas creditors to borrow USD decline and global credit spreads narrow. As the Fed resumes its purchases of US investment grade corporate bonds, US and Asian high yield bonds have benefitted from the positive spillover effects. In the equity markets, volatility has also edged lower from recent highs.

We believe that the loosening of liquidity constraints should limit the risk that this pandemic outbreak results in anything more than a cyclical, albeit sharp, slowdown.

Cheaper valuations

Price to book valuations suggest that the correction has created opportunities for long-term investors. While the price to book valuation of MSCI USA, for example, is currently below its long-term historical average, the valuation for MSCI Asia Pacific ex Japan is approaching its 2008 lows. See Fig. 2.

Fig. 2. MSCI Asia Pacific ex Japan – Price to book2

early-signs-of-bottoming-but-headwinds-remain-chart-02

Credit yields also look attractive at current levels. Compared against US Investment Grade bonds, the spreads for Emerging Market bonds are wide relative to history. That said, some caution is warranted as many Latin American issuers in the Emerging Market Bond Index are suffering from both the downturn in global activity and more recently, historically low oil prices.

A bottoming process

Stock and credit markets have responded positively to the unprecedented policy responses and have partially retraced prior declines. We believe that this is the start of a bottoming process which can historically last for many months.

For now, we maintain a neutral positioning towards equities within our multi-asset portfolios. While valuations are attractive, the technical indicators we follow as part of our proprietary analytics platform “LOGOs”, are mixed. Meanwhile, fundamental indicators such as business sentiment, equity earnings revision trends and macro risk measures remain poor and continue to present headwinds for the equity markets. We would need business sentiment to improve before we are convinced that the recent rebound in the equity markets is sustainable.

Nevertheless, we are taking advantage of the market dislocations in the derivative markets caused by the high levels of volatility. We have, where possible, implemented option positions which have already added value to our portfolios.

How to invest in Eastspring's fund(s)

This document is produced by Eastspring Investments (Singapore) Limited and issued in:

Singapore by Eastspring Investments (Singapore) Limited (UEN: 199407631H)

Australia (for wholesale clients only) by Eastspring Investments (Singapore) Limited (UEN: 199407631H), which is incorporated in Singapore, is exempt from the requirement to hold an Australian financial services licence and is licensed and regulated by the Monetary Authority of Singapore under Singapore laws which differ from Australian laws

Hong Kong by Eastspring Investments (Hong Kong) Limited and has not been reviewed by the Securities and Futures Commission of Hong Kong.

Indonesia by PT Eastspring Investments Indonesia, an investment manager that is licensed, registered and supervised by the Indonesia Financial Services Authority (OJK).

Malaysia by Eastspring Investments Berhad (200001028634/ 531241-U) and Eastspring Al-Wara’ Investments Berhad (200901017585 / 860682-K).

Thailand by Eastspring Asset Management (Thailand) Co., Ltd.

United States of America (for institutional clients only) by Eastspring Investments (Singapore) Limited (UEN: 199407631H), which is incorporated in Singapore and is registered with the U.S Securities and Exchange Commission as a registered investment adviser.

European Economic Area (for professional clients only) and Switzerland (for qualified investors only) by Eastspring Investments (Luxembourg) S.A., 26, Boulevard Royal, 2449 Luxembourg, Grand-Duchy of Luxembourg, registered with the Registre de Commerce et des Sociétés (Luxembourg), Register No B 173737.

United Kingdom (for professional clients only) by Eastspring Investments (Luxembourg) S.A. - UK Branch, 10 Lower Thames Street, London EC3R 6AF.

Chile (for institutional clients only) by Eastspring Investments (Singapore) Limited (UEN: 199407631H), which is incorporated in Singapore and is licensed and regulated by the Monetary Authority of Singapore under Singapore laws which differ from Chilean laws.

The afore-mentioned entities are hereinafter collectively referred to as Eastspring Investments.

The views and opinions contained herein are those of the author, and may not necessarily represent views expressed or reflected in other Eastspring Investments’ communications. This document is solely for information purposes and does not have any regard to the specific investment objective, financial situation and/or particular needs of any specific persons who may receive this document. This document is not intended as an offer, a solicitation of offer or a recommendation, to deal in shares of securities or any financial instruments. It may not be published, circulated, reproduced or distributed without the prior written consent of Eastspring Investments. Reliance upon information in this document is at the sole discretion of the reader. Please carefully study the related information and/or consult your own professional adviser before investing.

Investment involves risks. Past performance of and the predictions, projections, or forecasts on the economy, securities markets or the economic trends of the markets are not necessarily indicative of the future or likely performance of Eastspring Investments or any of the funds managed by Eastspring Investments.

Information herein is believed to be reliable at time of publication. Data from third party sources may have been used in the preparation of this material and Eastspring Investments has not independently verified, validated or audited such data. Where lawfully permitted, Eastspring Investments does not warrant its completeness or accuracy and is not responsible for error of facts or opinion nor shall be liable for damages arising out of any person’s reliance upon this information. Any opinion or estimate contained in this document may subject to change without notice.

Eastspring Investments companies (excluding joint venture companies) are ultimately wholly owned/indirect subsidiaries of Prudential plc of the United Kingdom. Eastspring Investments companies (including joint venture companies) and Prudential plc are not affiliated in any manner with Prudential Financial, Inc., a company whose principal place of business is in the United States of America or with the Prudential Assurance Company Limited, a subsidiary of M&G plc (a company incorporated in the United Kingdom).