2020 Q2 outlook: Navigating the eye of the storm

 

The global economy is entering the eye of the storm and investors can expect a very difficult time ahead before things improve in the second half of the year when the Chinese economy rebounds. In these lands of sorrow is one shinning beacon, namely the collapse in oil prices. This will not help much in the short-term as many are forced to stay at home, but eventually it will pay off as the economy rebounds. We expect the global economy to enter into a growth recession evident in Q2 and leave it by the end of the year. The outlook for Q2 is a difficult one as we suffer from a crisis the likes of which has not been seen since World War II.

The Covid-19 virus spread from China to the rest of the globe, and authorities are doing their best to contain it by taking drastic measures, e.g. lock-downs. In some countries, such as Italy, the healthcare system is on the verge of a breakdown. With most shops closed, brick and mortar style companies are suffering a very harsh shock, as are factories, while the much larger service sector can largely work from home. Consumers are now ordering from home even when they had never done so before.

Faced with this shock, we expect many companies to partially or fully layoff their labor forces leading to a sharp increase in unemployment from Europe to the United States. This combined with much lower oil means strong deflationary pressure, particularly in the United States where some sectors such as IT have very large profit margins.

The consequence is that many central banks from the Fed to the ECB will be able to keep a very easy monetary policy stance given the ample slack. That means the existing Quantitative Easing and Credit Easing will likely be amplified in the coming quarters. Specifically, we expect the Fed and ECB to move to credit intermediation for small and very small companies by sharing the risk with banks as the Fed just did. As they do so, the economy, also helped by fiscal expansions, will stabilize in a severe recession but as the virus fades through lockdowns and other measures, we should see growth slowly start to rebound led by China. First should come the pent-up consumer demand from weeks of confinement, then the realization that hard times are still ahead. Banks in developed economies entered this crisis on solid footing and we note that Nordic Banks are traditional safe-havens.

Q2 should be a very difficult quarter, but things should improve increasingly as we head to the end of the year. Faced with such a difficult environment, fixed income and flexible fixed income solutions are likely to play a significant part in asset allocation as safe havens and tools that can deliver better risk return profiles. Duration is unlikely to help as much now so that credit taking in investment grade is likely to help. We have been proponents of the Covered Bonds market for a long time given its ultra-safe profile and it continues to be supported by ECB purchases. Investors should keep in mind that in an era of high volatility, the ability of portfolio managers plays an important role as they can navigate the crisis. One typical example of this is Emerging Markets bond funds which have seen widely differing performance during the crisis depending on the portfolio manager. Multi-premia flexible solutions are another effective tool for stabilizing a portfolio during a volatile market.

We are in the early stages of a historical crisis. As elevated fear levels begin to ebb volatility in equity markets should fall, giving them a floor and some upside as the market bets on various rescue packages. Yet ahead of us is the realization of a very sharp recession, many profit warnings and bankruptcies. A stone has been cast into the proverbial pond and the ripple effects are being felt all the way to the shore. In such a volatile environment we prefer listed real estate and listed infrastructure. They offer a resilient profile to the downside and share in the upside.  

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Note: This is a NAM macro view, not the official Nordea view.

About Nordea Asset Management

Nordea Asset Management (NAM, AuM 235bn EUR*), is part of the Nordea Group, the largest financial services group in the Nordic region (AuM 324bn EUR*). NAM offers European and global investors’ exposure to a broad set of investment funds. We serve a wide range of clients and distributors which include banks, asset managers, independent financial advisors and insurance companies.

Nordea Asset Management has a presence in Bonn, Brussels, Copenhagen, Frankfurt, Helsinki, London, Luxembourg, Madrid, Milan, New York, Oslo, Paris, Santiago de Chile, Singapore, Stockholm, Vienna and Zurich. Nordea’s local presence goes hand in hand with the objective of being accessible and offering the best service to clients.

Nordea’s success is based on a sustainable and unique multi-boutique approach that combines the expertise of specialised internal boutiques with exclusive external competences allowing us to deliver alpha in a stable way for the benefit of our clients. NAM solutions cover all asset classes from fixed income and equity to multi asset solutions, and manage local and European as well as US, global and emerging market products.

*Source: Nordea Investment Funds S.A., 31.12.2019

Nordea Asset Management is the functional name of the asset management business conducted by the legal entities Nordea Investment Funds S.A. and Nordea Investment Management AB (“the Legal Entities”) and their branches, subsidiaries and representative offices. This document is intended to provide the reader with information on Nordea’s specific capabilities. This document (or any views or opinions expressed in this document) does not amount to an investment advice nor does it constitute a recommendation to invest in any financial product, investment structure or instrument, to enter into or unwind any transaction or to participate in any particular trading strategy. This document is not an offer to buy or sell, or a solicitation of an offer to buy or sell any security or instruments or to participate to any such trading strategy. Any such offering may be made only by an Offering Memorandum, or any similar contractual arrangement. Consequently, the information contained herein will be superseded in its entirety by such Offering Memorandum or contractual arrangement in its final form. Any investment decision should therefore only be based on the final legal documentation, without limitation and if applicable, Offering Memorandum, contractual arrangement, any relevant prospectus and the latest key investor information document (where applicable) relating to the investment. The appropriateness of an investment or strategy will depend on an investor’s full circumstances and objectives. Nordea Investment Management AB recommends that investors independently evaluate particular investments and strategies as well as encourages investors to seek the advice of independent financial advisors when deemed relevant by the investor. Any products, securities, instruments or strategies discussed in this document may not be suitable for all investors. This document contains information which has been taken from a number of sources. While the information herein is considered to be correct, no representation or warranty can be given on the ultimate accuracy or completeness of such information and investors may use further sources to form a well-informed investment decision. Prospective investors or counterparties should discuss with their professional tax, legal, accounting and other adviser(s) with regards to the potential effect of any investment that they may enter into, including the possible risks and benefits of such investment. Prospective investors or counterparties should also fully understand the potential investment and ascertain that they have made an independent assessment of the appropriateness of such potential investment, based solely on their own intentions and ambitions. Investments in derivative and foreign exchange related transactions may be subject to significant fluctuations which may affect the value of an investment. Investments in Emerging Markets involve a higher element of risk. The value of the investment can greatly fluctuate and cannot be ensured. Investments in equity and debt instruments issued by banks could bear the risk of being subject to the bail-in mechanism (meaning that equity and debt instruments could be written down in order to ensure that most unsecured creditors of an institution bear appropriate losses) as foreseen in EU Directive 2014/59/EU. Nordea Asset Management has decided to bear the cost for research, i.e. such cost is covered by existing fee arrangements (Management-/Administration-Fee). Published and created by the Legal Entities adherent to Nordea Asset Management. The Legal Entities are licensed and supervised by the Financial Supervisory Authority in Sweden and Luxembourg respectively. The Legal Entities’ branches, subsidiaries and representative offices are licensed as well as regulated by their local financial supervisory authority in their respective country of domiciliation. Source (unless otherwise stated): Nordea Investment Funds, S.A. Unless otherwise stated, all views expressed are those of the Legal Entities adherent to Nordea Asset Management and any of the Legal Entities’ branches, subsidiaries and representative offices. This document may not be reproduced or circulated without prior permission. Reference to companies or other investments mentioned within this document should not be construed as a recommendation to the investor to buy or sell the same but is included for the purpose of illustration. The level of tax benefits and liabilities will depend on individual circumstances and may be subject to change in the future. © The Legal Entities adherent to Nordea Asset Management and any of the Legal Entities’ branches, subsidiaries and/or representative offices.

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