Exposure rates of the Dorval Asset Management Range – 29th May 2020

A great number of observers feared a fresh decline on the markets as a result of investors’ so-called complacency, but we have actually seen quite the opposite.

A lot of fund managers had an overly defensive positioning at the start of the month, and most of them were wrong-footed by the robust pace at which economies reopened as well as by the extension in support programs. While it’s not in the bag yet, fears of a severe second surge in the epidemic are easing considerably. However, politicization of the crisis remains the primary source of risk, with US-China tension further escalating.


Main beneficiaries of the EU-proposed rescue plan
as a % of 2019 GDP for each country

Credit lines / Budget transfers
Greece / Romania / Slovakia / Portugal / Poland / Spain / Hungary / Italy / Czech Republic


For once, Europe came out well, now rising more to the magnitude of the challenge at hand in its latest response with a pan-European plan worth €750bn, involving hefty budget transfers to the benefit of southern and eastern European countries (cf. chart 1). Negotiations on the European Commission’s proposal look set to be animated and we will probably have to wait until the summer for a final compromise to be reached. In the meantime, each country is beginning to announce its own individual stimulus programs: a plan for the automotive industry has been decided in France, while further measures are set to follow for other sectors, and Germany will also present its action plan over the days ahead. Meanwhile the ECB will add to this on Thursday June 4 as investors expect fresh moves, including an increase in the public sector purchase program and perhaps some other corporate support measures. Isabel Schnabel, German member of the ECB’s Governing Council, was also very confident on the outcome for the crisis triggered by the judgment from the German Constitutional Court. So the ECB has free rein.


With economies reopening and in the absence of a sharp surge in Covid-19 cases, this good news coming out of Europe is helping the most cyclical sectors regain some ground against defensives, although volatility remains high (cf. chart 2). This outperformance goes alongside a clear narrowing in credit spreads, while the euro is also lifted by this European re-rating, up from 1.08 at the start of May to more than 1.11 on Friday, May 29.



Cyclicals/defensives ratio and credit spreads in Europe

Itraxx crossover (high yield credit spread, LHS)
Ratio cyclical vs. defensive stocks (Goldman Sachs baskets, RHS)


These trends caught a lot of investors off guard, as shown by the positions reflected in the renowned Bank of America Merrill Lynch monthly global fund manager survey (cf. chart 3). This survey suggests that defensive strategies continued to dominate at the start of the month, with a preference for safe stocks, and a clear underweighting for cyclical equities and European assets. According to this survey, two-thirds of investors questioned felt that the surge on stock indices since the end of March was merely a bear-market rally.



Fund managers’ positions at start of May 2020

Relative positioning vs. historical norm


These data suggest that optimism has not yet taken root, despite the stock-market recovery. US-China tension is dialing up again with the crisis in Hong Kong, so fresh areas for concern are emerging. However, unless this tension takes a dramatic new turn, the financial markets’ fundamental approach will probably remain dominated by the economic recovery, stimulus plans and investors’ gradual repositioning on a more positive macroeconomic scenario.



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