Pendal Concentrated Global Share Fund (APIR: BTA0503AU, ARSN: 613 608 085)
Effective 1 May 2020, the buy-sell spread of the Pendal Concentrated Global Share Fund (Fund) will decrease from 0.50% (with 0.25% payable on application and 0.25% payable on withdrawal) to 0.40% (with 0.20% payable on application and 0.20% payable on withdrawal).
The buy-sell spread is an additional cost to you and is generally incurred whenever you invest in the Fund. The buy-sell spread is retained by the Fund (it is not a fee paid to us) and represents a contribution to the transaction costs incurred by the Fund such as brokerage and stamp duty, when the Fund is purchasing and selling assets. The buy-sell spread also reflects the market impact of buying and selling the underlying securities in the market.
Importantly, the buy-sell spread helps to ensure different unit holders are being treated fairly by attributing the costs of trading securities to those unit holders who are buying and selling units in the Fund.
The Fund’s buy-sell spread will decrease to reflect a reduction in the Fund’s brokerage costs.
As transaction costs may change depending on various factors such as market conditions and brokerage costs, buy-sell spreads may also change without prior notice. You should therefore review current buy-sell spread information before making a decision to invest or withdraw from a Fund.
Please refer to our website www.pendalgroup.com and click ‘Products’ for the latest buy-sell spread for each fund.
Pendal MicroCap Opportunities Fund
Important Updates
Pendal MicroCap Opportunities Fund (APIR: RFA0061AU, ARSN 118 585 354)
Effective 23 April 2020, the Pendal MicroCap Opportunities Fund (Fund)’s buy-sell spread will decrease from 1.50% (with 0.75% payable on application and 0.75% payable on withdrawal) to 1.40% (with 0.70% payable on application and 0.70% payable on withdrawal).
The buy-sell spread is an additional cost to you and is generally incurred whenever you invest in the Fund. The buy-sell spread is retained by the Fund (it is not a fee paid to us) and represents a contribution to the transaction costs incurred by the Fund such as brokerage and stamp duty, when the Fund is purchasing and selling assets. The buy-sell spread also reflects the market impact of buying and selling the underlying securities in the market. Importantly, the buy-sell spread helps to ensure different unit holders are being treated fairly by attributing the costs of trading securities to those unit holders who are buying and selling units in the Fund.
The reduction in the Fund’s buy-sell spread reflects continuing improvement in trading conditions.
Pendal will continue to monitor market conditions and review and update the buy-sell spread regularly as required. You should therefore review the current buy-sell spread information before making a decision to invest or withdraw from a Fund.
Please refer to our website www.pendalgroup.com and click ‘Products’ for the latest buy-sell spread for each Fund.
Global improvement in health data has prompted a shift in the COVID-19 debate to how quickly economies can begin to re-open.
Here’s the latest Aussie equities outlook from Pendal’s head of equities Crispin Murray (pictured above), reported by portfolio specialist Chris Adams.
GLOBAL improvement in the health situation underpinned a 1.9 per cent gain for the S&P/ASX 300 last week.
This has prompted a shift in the COVID-19 debate to how quickly economies can begin to re-open.
The divergence in health outcomes here versus Europe and the US is becoming increasingly important. It gives Australia the option of an “elimination/suppression” strategy rather than herd immunity approach. This means a more expansive initial re-opening of the economy is possible.
This has important implications for the outlook at companies and for portfolio construction.
Health update
Global new daily cases have stabilised and the rate of hospitalisations in the US has continued to fall this month.
This is important because it opens discussion on how economies ramp up again.
However, it must be borne in mind that in some countries such as Spain, the rate of reduction in new cases is far slower than the original rise. In other words, the rise and fall has not been symmetric.
That means total cases must still be managed carefully against health care system capacity.
We also continue to monitor place such as Japan to help understand the risk of a second wave of infections as economies open up.
There was some excitement last week around antibody tests and medical trials – notably for Remdesivir. Nothing conclusive could be drawn. Samples sizes were too small or control samples not robust enough for policy makers to change tack in response.
But the market’s optimistic reaction was instructive and demonstrates how much liquidity there is sloshing about, looking for any excuse to find a home.
That said, it’s becoming evident from intensive care units in New York, that throwing everything at a patient in terms of potential treatments is having success in saving lives – even if the reasons why are not clearly understood. This is important because it provides some help in managing the mortality rate.
For countries such as US and Europe there is no option but to adopt a herd immunity strategy. The balance here is how much of the economy can be opened up while keeping the case load manageable. Anything that helps dampen the case load and its severity means fewer economic restrictions need to remain in place.
The rate of daily new cases in Australia does look somewhat more symmetrical — and has fallen sharply. If the virus can be effectively supressed, this allows the option of locking down borders but opening up the domestic economy more than would be the case in a country pursuing herd immunity.
Policy and economy
There was little news-flow on the policy front last week, however economic data is starting to filter through.
Business confidence indicators have fallen twice as far as during the GFC – although we are likely to see a snap-back in response to falling infection rates. Nevertheless it is becoming apparent from talking to companies that we are unlikely to see a rapid return to business-as-usual in terms of structure.
A degree of shell shock may prompt a more cautious approach for a period. This could feed through to investment, capital structures and business models.
Many companies are unlikely to reinstate their furloughed workforces in full. This is important to keep in mind when we think about the trajectory at which the economy will recover from its current position.
Markets
The US market has surged in recent weeks and recaptured almost 60% of its fall. It has returned to the levels of mid last year. Some are asking if this is credible given the economy may contract 10% or more this year.
A large proportion of the recovery is also concentrated in a relatively small number of growth tech stocks.
We remain relatively cautious in the near term given uncertainty around earnings and the potential sticker shock.
But we are also mindful of the tide of liquidity looking for home. This has helped propel the growth stocks – given a lot of money has been chasing stocks with the greatest earnings certainty.
We are seeing large divergences in relative valuations and a lot of mis-pricing. It is a good environment for active managers.
Australia’s market has not rebounded at the same rate as the US. We are back to the point of the late-2018 low.
This is partly because we don’t have the big growth stocks to dominate performance. However we still think the Australian market is well positioned versus other overseas markets given the potential differences in the path of economic normalisation.
COVID-19 scenario analysis framework
Pendal’s Australian equities team is continuously monitoring and updating its COVID-19 scenario framework.
The team continues to meet companies to understand first-hand what they face and how they are reacting. This included more than 200 company meetings in March.
We have been using a framework of potential scenarios to position the portfolios during recent events.
Our current view on the four key inputs into our scenario analysis are:
Case load and severity: Australian case numbers, growth rate and severity are well within the capacity of the health system. Better outcome relative to some other parts of the world, though case number growth is slowing in most major economies.
Depth and duration of economic hit: Still highly uncertain, but fiscal response and avoidance (so far) of level 4 restrictions critical in containing economic damage.
Nature of economic re-start: Still unknown. Debate is whether government pursues “elimination/suppression” or “mitigation” strategy. Australia has the option of the former, due to geography, political structure and current control over virus spread. This is not the case in the US or Europe.
Timing of medical breakthrough: Anti-viral studies still inconclusive. Optimism around vaccines is high, but length of time until widely available remains an issue.
Here is a downloadable PDF covering the full COVID-19 scenario analysis from Pendal’s equities team:
What’s the outlook for bonds right now? Pendal’s Head of Bond, Income and Defensive Strategies Vimal Gor gives a snapshot here in a video interview with online business channel Ausbiz on April 17, 2020.
Ausbiz is Australia’s newest online business channel. Watch here: www.ausbiz.com.au.
Ausbiz TV interviewer: I know early into this piece when we were at the cusp of these lockdowns and the work-from-home scenarios … you were talking about the need for massive fiscal responses. You said unimaginable amounts, maybe 20% of GDP or more. That’s not quite the extent that we’ve seen clearly in Australia, but that $2.3 trillion package coming out from the Fed last week — is that the kind of, do all, take-no-prisoners response you had been expecting or are you still expecting more?
Vimal Gor: Well in the US, if you take the monetary and the fiscal stimulus and normalise it and add it together, it’s about 40% of GDP. It’s so large, it makes your brain hurt to think about this size.
To give you an idea, if you’re a small company in the US, less than 500 people, the government is now going to pay your wages, rent and utilities, it says for two months. So you don’t have to any outgoings for two months.
Now that’s going to be fine if the duration of the coronavirus is quite short. If we drag this out for three, six, 12 months from now, well then that’s not going to be enough. And that’s the problem.
What the central banks and what the fiscal authorities are doing is they’re providing liquidity into the system, but we’re not solving the solvency issue at all.
You’re still going to have so many companies going bankrupt over the next few quarters.
Interviewer: Absolutely. What is your gut telling you, Vimal? Do you think that the worst of this is over? And just as a side note, we have had this unemployment read coming through here in Australia — the March unemployment rate’s at 5.2% — that’s better than the consensus of 5.4%. But when it comes to talk about economies opening up potentially, what are you feeling about where we’re at in this timeline?
Vimal Gor: The US number is expected to go from about 5% to about 20%. The April numbers are going to be roughly about 20% unemployed in the US. So when we’re talking 5.2, 5.5, they’re rounding errors. It’s completely irrelevant in the broadest trend of where things are going.
In terms of when we can reopen, obviously there’s a big clamour to reopen. Trump talked about the cure being worse than the disease and that’s true on an economic viewpoint. And right now we are purely looking at the lockdowns in terms of what it means to the population, in terms of deaths from the virus.
But there are also deaths from what happen if we lock down the economy. There’s poverty — look at India, which is in a full lockdown and it’s just been extended again. [consider] people in poverty there who are at risk of dying because they’re unable to get food.
So there are economic impacts as well. I think at the moment we’re clearly looking at the medical side — we’re not looking at the economic side — and there needs to be a full realisation of how bad the lockdown is for people and the communities and also health levels.
So I think that there’s both sides of the argument that needs to be looked to this. But I don’t see a quick re-opening. Also from the reading I’m doing we’re 12 to 18 months away from a vaccine. So we’re going to be living with this for a long time.
And as I mentioned, the solvency issues haven’t been dealt with, they’ve just been pushed further into the future. So I think this is going to be with us for a long time yet.
Interviewer: So given all of that, where to for global bond yields now do you think?
Vimal Gor: ,Oh that’s the easy one. They go to zero. Global bonds, apart from maybe Italy or Spain or Portugal or some of the smaller peripherals — pretty much global bonds around the world are going to zero. Central banks need them at zero.
We have to also accept and acknowledge the fact that bond yields going down doesn’t really help. It doesn’t really cushion the impact of the virus and the economic data, but it [also] doesn’t do any harm and that’s really where we are now.
It’s about doing anything that doesn’t do harm to help the economies along and pushing bond yields down to zero. It’s supporting them at those levels as we’re doing mass issuance across the world. It’s the only thing they can do. They can’t allow bond yields to sell off because that would have a slowing impact in the economy.
One of the issues for the US is, if your currency is weak, your currency’s strengthening, and your equity market’s going down — and then you get bond yields selling off — well then all three parts of your financial positions are tightening, and that’s really bad.
So they need to hold bond yields down — and they will hold bond yields down. We’re seeing the RBNZ talking about negative rates, RBA in any size at 25 basis points in three-years. The size of the programs we’re seeing in the US — to give you an idea, in the last QE program in the US they were buying about 80 billion a month. They were buying 75 billion a day, just last week.
I mean the size of the packages are so large and they have one aim, and that’s to get bond yields to zero across the world.
Pendal MicroCap Opportunities Fund
Important Updates
Pendal MicroCap Opportunities Fund (APIR: RFA0061AU, ARSN 118 585 354)
Effective 16 April 2020, the Pendal MicroCap Opportunities Fund (Fund)’s buy-sell spread will decrease from 1.60% (with 0.80% payable on application and 0.80% payable on withdrawal) to 1.50% (with 0.75% payable on application and 0.75% payable on withdrawal).
The buy-sell spread is an additional cost to you and is generally incurred whenever you invest in the Fund. The buy-sell spread is retained by the Fund (it is not a fee paid to us) and represents a contribution to the transaction costs incurred by the Fund such as brokerage and stamp duty, when the Fund is purchasing and selling assets. The buy-sell spread also reflects the market impact of buying and selling the underlying securities in the market. Importantly, the buy-sell spread helps to ensure different unit holders are being treated fairly by attributing the costs of trading securities to those unit holders who are buying and selling units in the Fund.
The reduction in the Fund’s buy-sell spread reflects continuing improvement in trading conditions.
Pendal will continue to monitor market conditions and review and update the buy-sell spread regularly as required. You should therefore review the current buy-sell spread information before making a decision to invest or withdraw from a Fund.
Please refer to our website www.pendalgroup.com and click ‘Products’ for the latest buy-sell spread for each Fund.
Wondering how to value markets right now? Here our head of Multi-Asset Michael Blayney gives a quick overview using three key charts.
Watch this short video recorded at Michael’s home office, or read the transcript below.
TRANSCRIPT
Hi, I’m Michael Blayney, Head of Multi-Asset at Pendal Group.
We’ve seen some very large falls in equity markets followed by a modest but sharp recovery. We’ve also seen very low cash rates and bond yields. The obvious question for investors is: “Where to now for portfolios?”
While it’s natural to want to bail out after seeing large losses, we know that ultimately crises do pass — and for a long-term investor, valuations are one of the key determinants of long-term returns.
So we’ve got a few charts today looking at valuations.
On the first of these (below), we look at a measure of smoothed earnings relative to prices. We then compare this to the subsequent five-year return that was achieved historically when these price-to-earnings ratios or PEs were at these levels.
We’ve done this incorporating data from the US, UK, Japan, Germany, and Australia.
What we observe from the chart is that when markets are very expensive, on average subsequent returns tend to be quite poor.
Indeed, you can see from the chart that when PE ratios started at a level of 30 or more, subsequent five-year returns on average were negative.
Conversely, low PE ratios have tended to correspond to strong subsequent returns.
In particular, when markets have been very depressed at PE ratios of 10 or less, subsequent returns have averaged almost 15% per annum.
At present, major markets are generally in the 10 to 20 range, with Australia, UK, Japan and Germany toward the lower end of the range — around 13 — and the US towards the upper end of the range.
On the second chart (below), we’ve shown our proprietary valuation indicators for equities. This is expressed as a Z score.
The best way to interpret it is that anything above 1 is quite cheap, anything above 1.5 is very cheap, and anything of -1 or worse is expensive or getting quite expensive.
Evaluation indicators incorporate a wide range of measures including through-the-cycle earnings, relativities to corporate bonds and forward-looking measures such as price-to-forward earnings.
We know brokers have started to cut forward earnings, but the level at which these cuts have occurred is nowhere near enough as yet. And we expect further revisions down to forward earnings.
As such, it would be logical to apply a haircut to these valuation measures.
However, even applying a sensible haircut to the valuation measures that come from our model, Australian equities still look reasonable valued and markets across Asia still look very cheap as does the UK and Germany.
In the US, the S&P 500 was extremely expensive coming into this bear market. We see on the quantitative measures of value, it’s now showing as being close to fair.
But we do need to factor in that earnings will almost certainly be revised down further and that US corporations have been buying back shares and increasing leverage significantly over the last decade.
As a result, we’d still be quite cautious on US large caps.
At the same time, real assets have fallen significantly in this market correction.
Many REITs globally now trade discounts to net asset value. Locally the A-REIT index trades at around a 25% discount to book value.
For a long-term, patient investor, this represents a very attractive entry point.
Turning to corporate bonds in our third chart, here we show the spread on US investment-grade corporate bonds spread through essentially the exit yield that you get for lending to a corporation rather than lending to a government (and taking on a degree of default and a liquidity risk).
Now, we note that even allowing for default rates in past deep recessions, these current spreads well and truly more than compensate investors for the risk that they’re taking on.
The final thing is that in this downturn, while at times government bonds and equities have sold off together, for the most part government bonds have continued to play their role and have been diversifying to equity market risk.
While it’s impossible to pick the exact bottoming markets, we do know that through market cycles a process of rebalancing to a long-term strategic asset allocation is one of the best ways to improve returns and reduce risk — with the natural benefit of a buy-low and sell-high approach.
So if investors do nothing else, rebalancing — ie selling some government bonds and topping up equity holdings in a strategic way — is a very sensible and prudent thing to do.
For investors who are able to tolerate a little bit more risk, there are some bargains to be had particularly REITs and Asian equities — and we’ve been buyers of those.
Overall, the key things now are not to panic, stay the course, and of course stay safe.
Thank you.
Regnan’s head of advisory, Susheela Peres da Costa
INVESTORS may think they invest in companies and markets. But they’re really investing in economies and societies.
It’s not until we experience a crisis like COVID-19 that this becomes clear.
When beverage producers start making hand sanitiser and car manufacturers start making hospital ventilators, it becomes clear there is limited value thinking about companies in isolation from their social context. When even the most blue-chip of companies have found themselves needing society’s generosity, the social contract becomes apparent.
As we recover, the community will expect businesses to meet their end of this bargain.
Susheela Peres da Costa, head of advisory at responsible investment and stewardship leader Regnan, makes these observations in the latest edition of Responsible Investor.
The article, COVID-19 shows universal owners need active ownership to safeguard social assets and advocate for principled political economy, can be found here.
Social assets such as population health, intellectual investment, cohesive communities and strong, trustworthy institutions are the foundations on which economies grow and markets flourish, Ms Peres da Costa says.
“If Environmental, Social and Governance (ESG) is about seeing the forest and the trees, COVID-19 shows how both depend on strong roots in solid ground.
“These foundations are all but invisible in better times. For this reason, they are easily undermined when we are inattentive to their maintenance.
“But widely-diversified investors are exposed to social assets and the performance of the economy, and need better metrics that enable them to monitor their strength and resilience through good times as well as bad.
“The interests of individual market actors can be in tension with the healthy whole.
“Investors also need ways to ensure those roots are not undermined for a one-off windfall. It is important to empower decision-makers who can prioritise social assets and thus the economy when faced with competing interests of market actors.”
Regnan is a leading provider of ESG research, engagement and advisory services.
Here is Crispin Murray’s weekly insight into Australian equities, reported by portfolio specialist Chris Adams. Crispin is Pendal’s Head of Equities.
LAST WEEK’S +4.7% gain in the ASX 300 reflected a more positive mood.
On one hand, there are signs the pace of COVID-19 case growth is decelerating globally. On the other, we continue to see a meaningful policy response to help economies cope.
Australia is doing a better job than many countries in containing the spread — and the fiscal support from the government is massive.
There is a possible scenario where Australia serves as something of a relative safe haven, with less investment uncertainty, in the near term.
Investor sentiment has improved but we remain wary of an ongoing flow of data which can deliver sharp sticker-shocks. US employment data, for example, has generally been coming in worse than expected.
We are not convinced yet that the market fully appreciates some of the second and third-order impacts on other parts of the economy not directly touched by the containment measures.
We will also see substantial capital calls likely in coming weeks, which will absorb liquidity and hold sentiment in check.
While the market is acting more rationally than was the case in the initial stages of the crisis, we think the current saw-tooth sideways pattern with high volatility could persist for the moment.
Infection rates
While the overall number of coronavirus infections is staggering, there are some positive signs emerging on infection rates.
Europe looks like it is flattening. Even the numbers coming through in New York are not as bad as some models predicted. This suggests measures to contain the virus are having some effect.
It demonstrates governments have the ability to exert some degree of control over the rate at which the virus spreads, depending on the measures they implement.
This is particularly so in Australia, where the daily percentage increases in new cases has fallen from more than 20% (NSW) in the third week of March to below 5%.
Authorities have had success identifying clusters and acting to contain them. The most recent data gives confidence that the Australian health system will cope with the virus.
It also lends authorities a greater degree of control over how and when containment measures are rolled back. This could mean structural damage to the economy may not be as bad as some fear.
It’s still unclear whether the government is going for a suppression strategy — which would lead to measures continuing through June — or whether a persistent low level of new cases would lead to an earlier roll-back of measures. It is interesting to note that Singapore reinstated some containment measures as case numbers began to pick up again.
Policy response
The federal government’s JobKeeper program is a material positive — and a larger response than many expected at this point.
Analysis suggests governments will need to spend 10% to 15% of GDP to adequately mitigate the economic effect of containment. This package equates to 6.5% of GDP which, in conjunction with previous measures, takes Australia’s total fiscal response above 10% of GDP.
It is important to remember the economic impact will still be very negative.
At this point the technical unemployment rate could still reach 10% — though without JobKeeper it could have been closer to 15%.
There is also the question of how the economy looks once we start to roll back measures. For example, it’s possible the hospitality industry has to keep some form of social distancing in place even when it re-opens – effectively allowing fewer patrons.
The six-month timeframe for JobKeeper still presents a risk factor for the economy if some industries take longer to normalise than others – which is likely to be the case.
Nevertheless, this package helps reduce the worst-case scenario in terms of unemployment and structural damage to the economy, better positioning it for a rebound.
It also signals the government’s intent to do whatever it takes.
Market observations
The JobKeeper announcement was the most significant development for Australian equities last week and helped underpin the market.
Lower correlations within the market suggest investors are allocating capital more rationally, as opposed to the “sell everything” mentality of a few weeks ago.
We are starting to see capital calls coming through. While the hardest hit companies are tapping markets early given more immediate stress, there are also signs of less-affected companies going early in order to get capital at reasonable prices.
They are reasoning that discounts may need to be larger if they wait longer. The market’s bounce and improvement in sentiment has also helped on the capital front.
There has been better support for some stressed companies than might otherwise have been the case, eg Webjet (WEB) -0.7%.
We expect a steady flow of cash calls will absorb some liquidity and have a limiting effect on any near-term market gains.
It is also important that companies are realistic in the amount of capital they are raising. They will want to be one-and-done. The market will be unforgiving to companies that come back twice.
Management will have to think through some of the more extreme outcomes. Auckland Airport, for example, raised enough capital to support liquidity to the end of 2021. On this basis they are expecting a scaled return in domestic traffic while international flights are disrupted for more than 20 months.
Brent crude oil rallied +35% last week on speculation of a deal between the US, Russia and Saudis to limit production. Thus far, nothing has emerged beyond a few Tweets.
Energy stocks rallied, but we believe the scale of the demand shock on sentiment will continue to overwhelm the likely supply side response. Any reprieve here may be short lived.
It is still too early to get a handle on the likely effect on corporate earnings. Most estimates range between 30-50%, with a bounce-back towards the end of the year.
While many are focusing on the near-term hit, we are also considering what the pace of recovery will look like. A company that sees a 30% fall in earnings – and then a 20% rebound – is still worse off than they were before the crisis.
It may not be until 2022 that we see some normalisation in earnings. It is too early to make this call, but it will have a material impact on valuations and must be assessed company by company.
Outlook
In terms of our list of four areas to watch which can help stabilise the market:
1) Medical breakthrough: Nothing tangible here yet. Testing results from a number of interesting initiatives is due in the next couple of weeks.
2) Policy response: Last week’s developments provide much better clarity and the scale of JobSeeker has helped reassure the market. However there is still a great deal of uncertainty over the degree to which it will soften the economic effect.
3) Oil stabilising: Some sort of deal looks more likely, but will still need to contend with hit to demand.
4) Confidence that health systems can cope with the flow of cases: There are signs of growing confidence here – particularly in Australia.
Pendal MicroCap Opportunities Fund
Important Updates
Pendal MicroCap Opportunities Fund (APIR: RFA0061AU, ARSN 118 585 354)
Effective 7 April 2020, the Pendal MicroCap Opportunities Fund (Fund)’s buy-sell spread will decrease from 1.86% (with 0.93% payable on application and 0.93% payable on withdrawal) to 1.60% (with 0.80% payable on application and 0.80% payable on withdrawal).
The buy-sell spread is an additional cost to you and is generally incurred whenever you invest in the Fund. The buy-sell spread is retained by the Fund (it is not a fee paid to us) and represents a contribution to the transaction costs incurred by the Fund such as brokerage and stamp duty, when the Fund is purchasing and selling assets. The buy-sell spread also reflects the market impact of buying and selling the underlying securities in the market. Importantly, the buy-sell spread helps to ensure different unit holders are being treated fairly by attributing the costs of trading securities to those unit holders who are buying and selling units in the Fund.
The Fund’s buy-sell spread increased on 26 March 2020 from 0.70% (with 0.35% payable on application and 0.35% payable on withdrawal) due to higher trading costs for ASX listed micro capitalisation equities as a result of COVID-19. The reduction in the Fund’s buy-sell spread reflects an improvement in trading conditions.
Pendal will continue to monitor market conditions and review and update the buy-sell spread regularly as required. You should therefore review the current buy-sell spread information before making a decision to invest or withdraw from a Fund.
Please refer to our website www.pendalgroup.com and click ‘Products’ for the latest buy-sell spread for each Fund.
Here is a weekly COVID-19 investor overview covering virus spread, economic impact and market insights from Pendal Head of Bond, Income and Defensive Strategies, Vimal Gor.
Watch this short video recorded at Vimal’s home office, or read the transcript below.
TRANSCRIPT
Here I am for our regular weekly COVID outlook.
On COVID-19, it’s quite clear that the curves are flattening everywhere.
Though obviously the US isn’t flattening nearly as much as everyone else. That’s because the extent of the lockdowns they’ve done have been so much smaller — and we’re still effectively hitting peak period in the US.
For the next week or so we can expect the numbers to increase in the US. But then alongside the rest of the world, we can expect them to start tailing off — and there’s already talk of people coming back to work.
The whole narrative is shifting now. Because the economic data has been so bad, as I mentioned last week, the whole focus now is on how quickly we can get people back to work and how quickly economies can get back to normal.
Focus has shifted from trying to stop the transmission of the virus — because we know it’s already beginning to tail off and we can see the curves flattening everywhere — to getting everyone back to work.
Trump recently said he doesn’t want the cure to be worse than the disease.
So as soon as we can open up the economies the better. And that’s happening because the economic data coming out are so atrociously bad. As I sit here today, the S&P is now down less than 20% from its all time high. You need to put that in perspective of economic data that’s going to be the worst since the Great Depression.
We’ve got this big disconnect that’s happening between asset prices and the underlying economic data.
The reason for that is the liquidity that’s flooding through the system. I talked about this last week.
The key issue is — this is liquidity. It’s not solving the solvency issue and that’s going to be an issue that’s addressed over the coming weeks and quarters and years.
So let’s just do a quick run through the asset classes before I sign off for the long Easter weekend.
Firstly, as you know, I love bonds. I love bonds pretty much everywhere apart from peripheral bonds in Europe and some of the Asian economies.
But generally I like bonds and I think the bond yields are going to zero across the world — so you can be a happy holder and make very good capital returns out of them over the coming period.
In terms of FX, I think the only call you need to make is about the US dollar. We know there’s still a dollar shortage out there, but the Fed and central banks around the world are doing everything to alleviate that shortage.
So I don’t think you can have a strong view on the dollar now until the balance comes out or one or the other side.
On commodities, I think all commodities apart from precious metals are coming down.
I think that’s a big disinflationary impact for the entire world and we’ll see that and feel it either the next quarters and years.
In terms of credit, I think there’s a bifurcation. You can happily own the stuff that’s high grade, and hopefully that the Fed’s buying as well, which is effectively investment-grade credit high up.
I don’t think you want to be in low-grade investment grade credit or the stuff the Fed is deliberately keeping away from, which is high yield.
So I think you need to be very careful about your credit exposure. You can safely own some sectors, but certainly keep away from others.
That’s it for this week. I’ll see you next week.