Exposure rates of the Dorval Asset Management Range – 12th June 2020

The severe correction on Wall Street on Thursday June 11 – plunging close to 6% – may point to the end of a period of exceptionally fast gains.

. While we cannot legitimately describe the current situation as a second surge in the Covid-19 epidemic at this stage, the rise in new cases in some US states comes as a stark reminder that the virus is still around. However, the logic of a worldwide recovery and a gradual reopening of sectors of the economy still stands firm, particularly as stimulus plans are set to continue.

 

The uptick in new coronavirus cases in around ten US states (Texas, Florida, etc.) is raising questions. For the moment, there is a substantial difference between the rising curve of new cases and the more reassuring curve of new deaths (cf. chart 1). Testing is being rolled out on an increasingly massive scale, and it appears that a large portion of the increase in new cases is coming from asymptomatic sufferers. There is also the possibility that lockdown measures may have been too feeble in these areas that were not severely affected by the virus initially, and they may also have moved out of lockdown too quickly.

 

Numbers of new tests, cases and deaths over 7 days on a rolling basis
Ten US states: TX, FL, NC, AZ, AR, CA, KY, MS, SC, UT

·       People tested / New coronavirus cases / Deaths

 

However, it is still clear that Covid-19 remains on the scene worldwide, as reflected in death figures in India, Latin America and Africa, and this situation means that the scenario of a second surge in the epidemic in the fall is still one of the possible outcomes. The OECD factored in this possibility of a double hit when it published its worldwide forecasts this week (cf. chart 2). The body projects that the dent to GDP from a second wave of infections would be around three times less than the initial shock as a result of better insight into the virus and the availability of masks among other factors, thus allowing for much less severe lockdown measures than in March and April.

 

 

OECD’s two scenarios for world GDP (index 100 in 4Q 2019)

 

 

 

Projections from the OECD or the Fed in the US are all obviously characterized by an extremely high degree of uncertainty, yet they serve to remind us of two obvious points: firstly, the worst is behind us, and secondly the shock from the Covid-19 outbreak can only be reversed by sustained, effective and massive public action. In this case, countries could more quickly and more comprehensively make up their lag than OECD projections indicate. In the US, some members of the Fed are expecting a fairly swift normalization in the economy, while others are less optimistic. The country’s Treasury Secretary Mr. Mnuchin has definitely heard the message and has now indicated that he is willing to take on a fourth fiscal stimulus plan, which could be finalized in July.

 

 

Overbought situation corrects
Euro Stoxx overbought/oversold indicator (25-day RSI)

On the financial markets, this means that the months ahead should be marked by a forceful acceleration in the economy – at least until the fall – along with ever more accommodative fiscal and monetary policies. Our asset allocation is still structured around this core scenario, and we continue to adapt our exposure rates to address momentum on the markets, which has been extremely swift since the end of March but has eased over recent days (cf. chart 3). Despite the recovery on the stock-markets over the past two months, medium-term upside in Europe remains significant: a third of the stocks on the Euro Stoxx 300 and 40% of those on the MSCI Euro Small Cap are still down more than 25% YTD.

 

 

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