The expert magazine of Ostrum AM

Read analysis and market views from Ostrum Asset Management’s experts in the new issue of Horizons

MACRO

Economic policy put to the test by post-lockdown period

After the recent health crisis sent out shockwaves, the macroeconomic challenge we now face is the speed at which economies can converge towards full capacity utilization. The stakes are high, as the faster they move towards 100%, the sooner they will iron out the dents from the health shock. The challenge for economic policy is thus to curb the lasting effects of the crisis on the economy. Governments therefore need to take an extremely active approach, and the plan presented by Angela Merkel in Germany, along with industry programs for the automotive and aerospace sectors outlined in France, are steps in the right direction. Meanwhile, the Europe-wide plan is also a move forward – even if it will not be rolled out straight away – and has already shifted perception of Italian risk.

FIXED INCOME

Opportunities abound as we emerge from the crisis

The fixed-income markets have been hit by an unprecedented crisis, with implied volatility soaring in March to hit 2008 figures. Investors were thrown into a panic and rushed headlong into risk-free assets – dollar-denominated more generally speaking – fueling a hefty outperformance for US Treasuries, posting +7.5% vs. a mere +1% average for the other G7 countries YTD. Fears of a supply shock subsequently dented expectations, as did the prospect of forthcoming issues to finance vast deficits, while the oil counter-shock played its part in pushing yields to lows right across the world. As soon as the Fed resumed its massive and near-unlimited purchase program, the US 10-year returned to its floor at 0.60%, and at the same time central banks across the globe reiterated their famous refrain of “low interest rates for a long time”.

CREDIT

Dispersed showings on the credit markets

With the world facing a recession that is very different to all previous crises – both more sudden and more widespread – the credit markets look well prepared to tackle future phases of volatility, and we think that investors should play periods of volatility by riding the rally wave. States have offered an unprecedented response – in both quantitative and qualitative terms – to the threat of economic paralysis and fears that a demand shock would add to the supply shock. Central banks’ monetary policy has therefore taken on a whole new dimension, and highly expansionary fiscal policies have gradually been rolled out.

EQUITIES

Beware of excessive confidence on the equity markets

The Covid-19 epidemic has plunged the world economy into a deep recession, and the outcome still remains highly uncertain, despite government intervention. Monetary easing has put paid to the downward spiral on the European equity markets, with the Euro Stoxx 50 now trading almost 800 points above figures at closing on March 18, at 2,410 points, its lowest in 2020. The rescue plan put forward by the European Commission and massive liquidity injections from the central banks have driven stock-market valuations up again, triggering a sharp rally at the start of June, with non-resident investors now revisiting the European markets.

Horizons Q3 2020

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