Exposure rates of the Dorval Asset Management Range – 22nd May 2020

Alongside the gradual reopening of economies from April onwards, we are also seeing an upturn in economic activity indicators.

Composite PMI recovered in May in the euro area, the UK, the US, Japan and Australia. For now the rest of the world is following the trail blazed by cyclical indicators with a few weeks’ lag, so the cycle trough is now behind us, bar a second surge in the epidemic.



However, this new phase is still a far cry from full normalization. Firstly, the virus is still in circulation, so moves to reopen economies are necessarily partial and gradual. Both fiscal and monetary support must continue and ramp up, with stimulus plans aimed at driving demand as of this summer, as well as support for supply. There is a real danger of political fatigue on this issue, and this must be countered. The debate on the sustainability of public debt and the financing of deficits is not the priority, and monetary support from the main central banks makes this a less pressing issue.


The Macron-Merkel plan, which was announced a few days ago, should be assessed with this in mind. The announced figure for the rescue fund is €500bn, which equates to 3% of the EU’s GDP: funds should be paid out to Member States from 2021 onwards in the shape of subsidies, rather than loans. The plan still has to jump through several hoops before it becomes reality, but it marks political progress that should be welcomed. By enabling the European Union to take on debt in its own name by drawing on its budget – which would increase from 1.2% to 2% of the EU’s national income as a result of this program – Macron and Merkel are offering a fresh turn in the long and winding road to European integration. This political initiative – the more optimistic observers compare it to the creation of US federal debt by Hamilton in 1790 – acts as a counterbalance to another political move, the judgment from the German Constitutional Court against the ECB’s actions.


Politics is actually making a forceful comeback in this crisis with tension between the US and China. We knew that the approaching and hotly contested presidential elections in the US in November would push Donald Trump to his usual extremes, and he has lived up to these expectations. The White House knows that by targeting China, it can enjoy the support of a large portion of the population. Meanwhile, China is taking advantage of the crisis to further its interests: with all western governments focusing on managing the health crisis and its economic fallout, Beijing is further tightening the legal framework for its relationship with Hong Kong. Casting doubt over Hong Kong’s special status means jeopardizing one of the main economic and financial points of contact between China and the west, so the worst case scenario is not a certainty given the vast economic cost for both countries, against an already tough backdrop as a result of the current pandemic.


Looking closer to home, Brexit negotiations are at deadlock as June 30 approaches – the deadline for the UK to request an extension to the effective Brexit date currently slated for December 31, 2020. Ironically, the disruption to trade resulting from Covid-19 makes a hard Brexit less costly…and hence more likely.


So with this clash between a recovery situation and current politicization, we will sit tight and wait. A more positive scenario remains possible i.e. faster medical progress than expected in finding a reliable treatment for Covid-19, as well as a vaccine by early 2021.




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