Exposure rates of the Dorval Asset Management Range – 5th June 2020

The reversal on risks is being borne out: cyclical stocks and financials that had been cast aside during lockdown are making a powerful comeback, while safe-haven strategies are struggling.

Risk has shifted towards sovereign bonds and the most defensive stocks. The economic recovery is only getting started, especially in manufacturing and construction (cf. chart 1). Beyond the reopening of economies facilitated by countries’ success in getting a grip on the epidemic in both the west and Asia, the economic rebound is also being driven by several stimulus programs and unrelenting support from the central banks.

 

Manufacturing recovery is only getting started

·       World manufacturing PMI

 

After the declaration of a pan-European plan worth €750bn, which remains to be approved by the EU 27, national stimulus plans have been announced one after the other. Germany is shelling out €130bn – close to 4% of GDP – including a temporary 3% cut in VAT, along with other targeted moves. Meanwhile France has progressively announced sector stimulus and rescue programs i.e. automotive, restaurants, construction, etc. The ECB has increased the size of its pandemic emergency purchase program (PEPP) from €750bn to €1,350bn (equating to 10% of GDP), showing that it does not feel under threat from the German Constitutional Court’s judgement.

 

Looking across the pond, the Fed is to meet on June 10 in a very different market environment to its latest get-together. The S&P 500 has moved back above the 3,000-point mark and the yield curve on Treasury bonds has recovered considerably (cf. chart 2). This surge in long-term rates is only the logical upshot of the economic recovery for now, but if this increase were to gather pace considerably, the Fed may take action to limit the rise. Some members of the central bank have already made noises about taking action to set the target figure for mid- or long-term rates in a strategy known as yield curve control. The Bank of Japan has already pursued this practice on the 10-year rate since September 2016, while the Bank of Australia embarked on a similar strategy for the 3-year rate a few months ago. We will be keeping an eye on this debate.

 

 

Recovery leading to upturn on US yield curve
Yield on US Treasury bonds

·       30-year / 10-year / 2-year

A more robust economic recovery than expected, the upturn on yield curves and the improvement in European governance have all helped lift European banking stocks from the doldrums (cf. chart 3). On the markets, the recovery theme is extending to financials and small-caps, but also to commodities and emerging markets, while the dollar is slumping again, as the pre-coronavirus world is “taking its revenge”. In our international portfolios, we have kept up with these changes by further diversifying our cyclical strategies (construction, financials, industrials, energy, consumer discretionary), gradually reducing our exposure to the long end of the bond yield curve and limiting exchange rate risk.

 

 

Economic rebound and upturn in yield curves benefit banks

·       Eurostoxx banks index

 

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