Exposure rates of the Dorval Asset Management Range – 11th September 2020

Volatility on the Nasdaq, Covid-19’s resurgence in Europe along with UK-EU tension are curbing investors’ risk appetite in the short term.

Yet the overall macro-financial environment remains upbeat for equities, as the world recovery shapes up and interest rates stick at extreme lows.


The Nasdaq seems to be stabilizing after shedding 10% in the space of three days last week, but volatility remains high on the index at close to 40%. However, for now most investors are seeing this correction as a welcome and localized occurrence, and for the time being there is little – although not zero – knock-on effect on the European markets, which are not really affected by fears of a speculative bubble (cf. chart 1). In the short term, we cannot rule out the possibility that stronger selling on illustrious US stocks will spread to the rest of the market, but only time will tell. However, if this scenario were to materialize, it would not trigger a significant macro-financial shock, but rather we feel that it would be an opportunity to ramp up positions on the equity markets as they do not look overvalued overall in our view.




Surge in Nasdaq’s volatility has little impact on European market for now

Nasdaq 100, implied volatility / EuroStoxx 50, implied volatility


The resurgence in the Covid-19 epidemic has definitely been confirmed in both Spain and France, but news coming out of China – which reopened cinemas at the end of August – and the United States, which is currently stemming its second spike in cases, is much more optimistic. The situation is far from comfortable, but the world economy is shored up by support programs and is able to pick up again, despite the effects of the virus. However, any announcement of a vaccine making it through phase III trials would put a welcome stop to doubts. AstraZeneca had announced that it was pausing its trial due to serious side effects for one of the participants, but still thinks that the vaccine – developed in partnership with Oxford University – will be ready by the end of the year. Trials by other pharmaceuticals companies are pointing in the same direction, and have the same timeframe.


The UK left the European Union at the start of the year, but the country’s divorce from the single market – slated for the end of the year – has not yet been formalized. Boris Johnson put the cat among the pigeons when he reneged on certain aspects of the agreement that was ratified in late 2019, with the EU responding with an ultimatum. The main stumbling block in current negotiations involves rules on state aid for companies, which ensure a level playing field. A last-minute compromise – probably in return for the UK easing its position on fishing – looks like the most likely outcome at this stage. If the parties fail to come to an agreement, WTO rules would govern UK-EU trade, triggering a negative shock, particularly for the UK: however, this would be partly obscured by the glut of massive fiscal and monetary support plans on both sides of the Channel. The main victim in this scenario would be sterling, which has already weakened (cf. chart 2).



Already severely weakened sterling would be the main victim of a no-deal exit from European single market

Brexit referendum / UK leaves EU / Planned exit from single market
Sterling vs. euro


In our view, the various risk scenarios (Nasdaq, Covid-19, Brexit) are not so perilous as to jeopardize our core constructive scenario at this stage. The buoyant world economic environment (start of cycle), highly expansionary economic policy, hopes for a vaccine and extremely low interest rates still advocate in favor of the equity markets. Against this backdrop, Dorval AM’s portfolios remain well invested, with diversified investment themes and a preference for the most cyclical sectors.




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