Investors' Outlook Of groundhog fears and pandemic lessons - May 2020 - Vontobel Asset Management
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Investors’
Outlook
Of groundhog fears and pandemic lessons
May 2020
Asset Management
For institutional investors only / not for public viewing or distribution
2
Editorial
For institutional investors only / not for public viewing or distribution
Of groundhog fears
and pandemic lessons
Dear readers,
Spring is here and public places around Lake Zurich and elsewhere in Europe are
filling up with pale, squinting folk emerging from their dens. However, like a Penn-
sylvanian groundhog (or a Swiss marmot) at the sight of a shadow, the sunseekers
may sometimes feel it would be safer to return underground.
Will there be a second wave? Inventories are anything but evil
In the past weeks and months, we have been responsible However, we do know a few things. Governments have
citizens, abiding by stringent rules otherwise reserved for realized that making light of an unknown disease spread-
times of war. Admittedly, some aspects of the global lock- ing in a far-off place could have disastrous consequences.
down have their benefits. When was the last time you saw Our companies, some of which had embraced Apple
a clear blue sky without condensation trails, or skylines chief executive Tim Cook’s famous saying that inventories
cleared of the blur of toxic fumes? Then again: when was are “fundamentally evil”, 2 now see the need to build them
it the last time so many patients around the world needed up. And on a personal level, we have realized the possibil-
to be put on a ventilator, and the global economy on a ity of a major health crisis will always be hanging around
drip-feed? our necks – think of the Spanish flu right after World War I
(see chart 1).
For all the explanations of knowledgeable or self-ap-
pointed experts on Covid-19, the exact origin, preferred To gauge the consequences of an economic shock on
host, or lethality of the virus remain unclear. There are economies, we can look at what happened in the US or
dozens of debates on specific issues such as whether Switzerland during the times of the world wars. These
nicotine increases or lowers the risk of falling seriously ill countries were spared an armed conflict on their home
with the disease.1 More importantly, nobody knows if turf and were able to maintain their production base. Even
there will be a second coronavirus outbreak later in the so, they were hit hard economically. Consumer sentiment
year, or when a vaccine might be available. took a massive and longer-than-expected blow as people
put off purchases. Production shifted from the manufac-
turing of discretionary to wartime goods.
Chart 1: The number of deaths caused by Covid-19 is still relatively moderate in historical terms
Fatalities 1,000,000 2,000,000
The «Black Death» plague (1331 – 53) 75 million
Great plague of London (1665 – 66) 100’000
First cholera pandemic Asien / Europa (1816 – 26) 100’000
Second cholera pandemic Asien / Europa (1829 – 51)
Russian cholera pandemic (1852 – 60) –6.4 1’000’000
Global flu pandemic (1889 – 90) –6.6 1’000’000
Sixth cholera pandemic (1899 – 23) 800’000
Encephalitis lethargica pandemic (1915 – 26) 1’500’000
Spanish flu (1918 – 20) 100 million
Asian flu (1957 – 58) 2’000’000
Hongkong flu (1968 – 69) 1’000’000
Swine flu pandemic (2009) 203’000
Current Covid-19 crisis (2020 – ?) 218’456
Source: Longer-Run Economic Consequences of Pandemics, Ò. Jordà, S. Singh, and A. Taylor, Federal Reserve Bank of San Francisco, Working Paper 2020-09,
data as of April 28, 2020
3
Editorial
For institutional investors only / not for public viewing or distribution
Past experience suggests there will be a quick release Chart 2: The current US recession is among the biggest
of pent-up demand after the crisis. This, we believe, will ones since 1790
be quicker than what we saw in the US and Switzerland Annual real GDP growth
after the world wars. The corporate world will probably 2020 –5.5 Vontobel US GDP forecast
adjust to governments’ ambitions to achieve a degree 1919 –3.6
of self-reliance in medical equipment production. How- 1920 –4.4
ever, bringing back manufacturing from better-equipped 1905 –6.4
suppliers overseas will come at the price. Taking a step 1861 –6.8
back from globalization, a process that started after the 1857 –7.4
global financial crisis a decade ago, will lead to lower 1930 –8.5
productivity. 1864 –8.9
1808 –10.7
Open in May, see debt speed away 1946 –11.6
In light of the current decline in infection rates, we will 1932 –12.9
probably see many countries reopening for business in
0 –2 –4 –6 –8 –10 –12 –14
May. This would be compatible with our baseline eco-
nomic scenario of a sharp slowdown followed by a Source: US Bureau of Economic Analysis, Vontobel (forecast from April 28, 2020)
U-shared recovery. The recent support measures by gov-
ernments and central banks to save jobs and companies
support this view (see chart 2). However, these rescue Moving to a neutral equity stance
efforts will have the unwanted side effect of increasing We are neutral equities again after closing our small
indebtedness nearly everywhere. Stopping this runaway underweight position in emerging markets. After taking a
debt train will be nearly impossible – which, perhaps, isn’t first-quarter fall, stock prices look set to recover gradu-
even necessary, if you believe in the concept of the ally. Our underweight stance on government bonds
so-called Modern Monetary Theory (MMT). 3 remains unchanged, as does our overweight for corpo-
rate paper. Monetary authorities have been purchasing
Provided there won’t be a major second wave of corona- corporate bonds for some time, and there is truth in the
virus infections later this year, attention will gradually shift saying “buy whatever central banks are buying.” Gold is
to “ex-corona” topics such as: among our favorites given “lower-for-longer” yields, rising
state debt, and MMT-style financing. Moreover, a peaking
– US presidential elections – in the eyes of market par- US dollar gives gold a boost as well. In the alternatives
ticipants, a Joe Biden, Democrat administration would bracket, we have upgraded Swiss real estate to over-
be less business-friendly than the Trump administra- weight after valuations have come down. Our negative
tion given the Democratic Party’s traditional focus on view on the US dollar remains in place, reflected in a short
higher taxes and stronger regulation. Whether or not USD / CHF position.
Donald Trump’s erratic stance on the pandemic will
hurt his election prospects remains to be seen. Like the protagonist in the film classic Groundhog Day,
– US – China relationship – The trade conflict is far from we may be in the process of reliving a situation over and
over. New or increased tariffs, which could also hit over again. Let’s hope that like Bill Murray, we will be able
European car exports to the US, are still possible. to get smarter every time.
– European politics – Brussels dealing with problems
including Italy’s new euro-skepticism, and cumber- Stay healthy,
some Brexit negotiations with the UK.
Frank Häusler
Chief Strategist, Vontobel Asset Management
Input deadline for this edition
April 28, 2020
1
Recent tests with nicotine patches on coronavirus patients (“French researchers to test nicotine patches on coronavirus patients”, The Guardian,
April 22, 2020) seem to contradict findings published in an article in the medical journal Tobacco Induced Diseases from March that smokers face
a higher risk. http://www.tobaccoinduceddiseases.org/The-society-ISPTID,774.html
2
“Inventory Is ‘Evil’? Not so Fast”, The SupplyChainBrain, September 25, 2019
https://www.supplychainbrain.com/media/podcasts/1211?audio_file_id=0&id_raw=1211-the-supplychainbrain-podcast&page=5
3
The Modern Monetary Theory is revolves around the idea that instead of aiming to reduce debt directly, it is more important to boost growth and
employment while the lender of last resort (i.e. the central bank) can buy debt and keep interest rates low (also see our whitepaper:
https://am.vontobel.com/en/insights/modern-monetary-theory-how-do-we-get-down-from-the-debt-mountain). This is already the case in the UK;
where the Bank of England has decided to may debt securities hot off the press.
4
Positioning
For institutional investors only / not for public viewing or distribution
The word “virus” contains a “V”
and a “U”, not an “L”
At the beginning of March, econo- UNDERWEIGHT NEUTRAL OVERWEIGHT
mists were still assuming that China significantly slightly slightly significantly
would improve rapidly after the mea-
sures to curb the virus and a down-
beat first quarter. That would have
looked like a V on the charts. How-
ever, this scenario was scuppered 1
when other countries started turning
their lights out one after the other.
Liquidity
While the central banks can hardly
revive an economy that has been
locked down, their measures are still
needed to prevent a depression-like
scenario. Around the world, govern- 2
ments are also providing fast, uncom-
plicated economic aid, for instance in
Bonds
the form of emergency loans. These
steps will help to keep private house-
holds and companies above water.
We believe that this recovery would
look like a U. Also, new Covid-19
cases are falling globally, which is lift- 3
ing the financial markets.
Equities
4
Gold
5
Commodities
6
Alternative strategies
Changes month-on-month:
same, higher, lower
5
Positioning
For institutional investors only / not for public viewing or distribution
—
Reto Cueni, PhD
Senior Economist,
Vontobel Asset Management
Our view of the world and our risk
outlook for the next 12 months
China seems to have brought the spread of the coronavirus under control,
and its economy is slowly getting in its stride. Nevertheless, Chinese first-
quarter GDP figures show a worse-than-expected slump. The downturn in
industrialized countries is likely to be even bigger. We currently believe the
restrictions imposed on public life will be able to contain the pandemic to a
We recently reduced cash to underweight. degree that would allow the authorities to gradually lift the lockdown mea-
We still firmly believe that the US dollar will sures around summer time. This may usher in an economic recovery in the
weaken in the medium term. We are therefore second half, particularly in the euro zone and in Switzerland. The rebound in
retaining our USD / CHF short position.
the US and Japan will be more muted and will come later, in our opinion.
For any rebound to materialize, knock-on effects such as unemployment,
bankruptcies and bad loans must remain relatively low. This should be
Government bonds offer little in the way of return possible in light of the massive support measures by governments and
potential in the current environment, and so we
are keeping them underweighted. By contrast, central banks, provided most restrictions will be lifted at some stage
we are still overweighting corporate bonds as (see Macro Highlights section, pages 6 – 7). The inflation outlook has weak-
this segment will be supported by the measures ened significantly because of the collapse in demand and the sharp decline
taken by governments and central banks.
in energy prices. Nonetheless, prices should pick up again as soon as the
economy begins to recover in the second half of the year. Even so, central
banks will in all probability maintain their loose monetary policy.
Our outlook rests on the assumption that economically significant areas of
We have recently given up our slight underweight
in favor of a neutral positioning. The liquidity glut the world will be able to put a halt to the spread of the coronavirus in the
from the central banks is benefiting the stock spring, that there will not be stricter restrictions imposed and the flow of
market as well. Likewise, companies and con- goods will not be cut off. Should this prove not to be the case, the potential
sumers are profiting from state support.
negative repercussions are almost impossible to conceive. On top of this, a
sharper tone in the trade dispute between the United States and its trading
partners or in the exit negotiations between the UK and Brussels would also
be a bad omen.
We are keeping gold overweight. The precious
metal shines brighter in times of expanding state GROWTH INFLATION CENTRAL BANK
debt. Gold is also benefiting from the recent
depreciation of the US dollar. We expect a sharp growth Core CPI to stay below With rates at zero, the
contraction in 1H due to the target as a slump in Fed is buying assets
Covid-19 crisis, and a gradual demand outweighs a worth trillions of USD.
recovery in 2H. supply-side decline.
The pandemic fallout will lead Lower energy prices The ECB stays put on
Authorities’ measures to support the economy to record weak 1Q and 2Q, will dampen inflation rates but announces
have no effect on commodity investments. Oil recovery expected towards in 1H. Also, demand massive liquidity
prices have even fallen below zero. As long as the summer and in 2H. falls faster than supply. programs.
there is no significant economic recovery and The Covid-19 crisis will send Lower energy and Rates unchanged but
no strong depreciation of the US dollar, we are the economy lower in 1Q and import prices as well heavy intervention in
refraining from an overweight. 2Q, rebound seen towards the as Covid-19 pushes the currency market.
summer and in 2H. CPI outlook mostly
below zero in 1H.
After 1Q contraction but Inflation is not an issue Aggressive monetary
economy slowly opening up. at the moment as the and fiscal stimulus are
Trend growth seen lower than economy is digesting in place.
Although their return is somewhat modest, before the crisis. the supply and demand
alternative strategies can be a good fit as portfolio shocks.
diversifiers. Within this asset class, we are now
overweighting Swiss real estate, but are staying The economy will slow sharply Core inflation expected Now in “unlimited QE”
neutral overall. in 1H 2020. We expect three to stay close to zero in mode. Continues to
consecutive quarters of GDP 2020, deflation risks control yield curve.
contraction. could re-emerge.
6
Macro Highlights
For institutional investors only / not for public viewing or distribution
Expect a sharper downturn
amid a gradual re-opening
of economies
— — —
Reto Cueni, PhD Sandrine Perret Sven Schubert, PhD
Senior Economist, Senior Economist, Head of Strategy Currencies,
Vontobel Asset Management Fixed Income Strategist, Vontobel Asset Management
Vontobel Asset Management
Despite early signs that the spreading of the Covid-19 virus can be
contained, governments are likely to relax the most severe restrictions
on public life only very gradually. Economic losses seem to be larger
than expected during lockdown period. We continue to predict a
recovery over the summer and throughout the second half with Asia
and Europe improving ahead of the US.
We have again lowered our forecasts versus our previous a program worth 540 billion euros to support hard-hit
end-of-March estimate (see chart 1) amid dismal eco- countries, provide more lending via the European Invest-
nomicdata such as rising unemployment claims or evi- ment Bank (EIB), and install a back-up fund for national
dence of economic activity derived from lower traffic unemployment systems. While northern and southern
congestion, or air pollution data. Moreover, Chinese countries bicker over the terms of new expenditures
first-quarter GDP figures were below market expectations. and transfers – there is disagreement on the amount and
whether the money should be transferred as a grant or a
On the other hand, central banks around the world have loan –, we believe there is room for more support mea-
responded quickly, ensuring an almost uninterrupted sures through a still to be created recovery fund financed
flow of liquidity into the financial system. Governments out of the European Union’s budget. While mutual debt
also stepped up to the plate, launching additional fiscal issuance championed by southern Europe known as
expenses or other liquidity programs to mitigate sec- “euro-” or “corona bonds” seems out of reach, there may
ond-round effects like insolvencies of firms or house- be a similar, albeit limited solution in the form of debt
holds via extraordinary loans and credits (see chart 2). emitted by the EU Commission.
Lower growth, more liquidity, more debt in Europe The economic outlook in Europe may seem bleak, but
We now expect the euro zone economy to contract by national fiscal programs and shock-absorbing mecha-
4.9 % (previously –3.5 %). European leaders have passed nisms are better here than in the US. So-called “automatic
7
Macro Highlights
For institutional investors only / not for public viewing or distribution
stabilizers” European companies can resort to are, for Chart 1: We now expect the global economy to contract
example, short-time work schemes allowing them to keep by –2.8 % vs –1 % end-of-March estimate
people employed in times of crisis. America’s safety net is In % (comparison of GDP levels for 2020)
much less comfortable, and this situation results in a 6.5
surge in unemployment (see chart 3). The euro area 4.5
should therefore be able to get back on its feet quicker 2.5
and with less collateral damage than the US. Whatever 0.5
form the recovery in Europe and the US will take, the debt –0.5
burden will increase. We therefore expect the European –2.5
Central Bank to step up its asset-purchasing program to –4.5
keep interest rates low to support fiscal expenses and –6.5
mitigate the negative economic effects of the lockdown. China US EMU Japan Global
Estimate before the outbreak of Covid-19
US woes apparent in rising unemployment Estimate as of April 28, 2020
The record-high job losses in the US are a good indica- Source: Vontobel
tion of the country’s economic hardship. Initial jobless
claims reached 30 million over the past six weeks, far
worse than during the financial crisis ten years ago.
While the Trump Administration is putting a high pressure Chart 2: The euro zone and Japan with the most
to reopen the economy, which contracted by 4.8 % in the extensive government response to Covid-19
In % of GDP
first quarter (versus previous quarter, annualized) accord-
ing to early official estimates, it will be for US states to 25.0
decide how they want to proceed. On April 24, the US 20.0
Congress passed a fiscal package of 484 billion US dol- 15.0
11.0
lars (or 2.2 % of GDP).This will provide more funds to hos- 10. 5.3 18.3
pitals and the Paycheck Protection Program (PPP), a 5.0
4.5 8.2 2.5 10.0
scheme launched to channel loans to small and medi- 0.0
China US Euro zone Japan
um-size enterprises. The 350 billion USD initially available
Extraordinary government spending
for the PPP was fully used during the first two weeks of
Extraordinary liquidity measures
the plan. The Federal Reserve’s buying spree shows no (loan guarantees, loans, equity injections)
sign of abating. Its fast-rising balance sheet shows that it
Source: Government agencies, media reports, Vontobel (data as of April 23)
is fully implementing is extraordinary policy measures.
Chairman Jerome Powell has indicated that the monetary
authority will keep the federal funds rate at zero for some
time. We think the next move may include moving to a Chart 3: European employers can put workers on short-
flexible “yield curve control” policy aimed at keeping time programs, unlike US counterparts
In % of total labor force
some short-term rates low and ensure accommodative
financial conditions. 100
80
Asia with an edge over Latin America 60
Japan’s state of emergency is likely to remain in place at 40
least until mid-to-late May. Prime Minister Shinzo Abe’s 20
government passed a substantial fiscal package of 117 0
US US Germany, France, Germany, France,
trillion yen (USD 1.1 trillion), with nearly half of the money (4 weeks ago) (Latest release) Italy Italy
coming as additional fiscal spending. This is likely to take (4 weeks ago) (Latest release)
Japan’s debt level to above 250 % of GDP according to
Number of people employed
IMF estimates. Elsewhere in Asia, the pandemic is likely to
Number of workers on short-time schemes
trigger a recession in many emerging countries. However, Number of unemployed
Asian economies are in a better position than Latin Amer-
Source: National statistical offices and employment agencies, media reports,
ican ones, for example. The commodity price sell off is Vontobel calculations (data as of April 23)
likely to hit Latin America harder, a region already weak-
ened by political crises and low growth. Unlike in Asia, few
countries can arrange vast support programs because of
their high debt burden. Moreover, Asian economies seem
ahead in terms of falling new Covid-19 infections, which
allows Asia to loosen social distancing rules earlier than
other regions. China, for example, has been opening its
economy gradually since early March, and some industrial
production levels are back to approximately 80 % – 90 % of
normal capacity. That said, some Asian economies will be
in recession, but those probably won’t be as massive as
in parts of Latin America.8
Asset classes in focus
For institutional investors only / not for public viewing or distribution
Corporate bond afloat as central bank
money lifts all boats
— The European Central Bank (ECB), by contrast, currently
Sandrine Perret only buys investment-grade credit as part of its Pandemic
Senior Economist, Emergency Purchase Program (PEPP) (see chart 1). How-
Fixed Income Strategist,
Vontobel Asset Management ever, it may go down the “junk” road too, as is already the
case in in a different line of its business. Banks that want
to access the ECB’s lending facilities can now deposit as
collateral high-yield bonds downgraded during the coro-
navirus crisis. Elsewhere, the Bank of Japan at its April
policy meeting increased the maximum volume of corpo-
rate bonds and commercial paper eligible for its purchase
Among the main beneficiaries of central banks’ liquidity program worth 20 trillion yen designed to ease strains in
injections are corporate bonds. Their spreads to safe corporate funding.
government bonds have narrowed again after the pan-
demic scare had driven them higher in March. We keep Coupons of corporate bonds in focus
our small overweight in corporate investment-grade Since March, decisive central bank action and declining
credit while remaining neutral on high-yield. market volatility eased liquidity concerns, helping to
bring corporate bond spreads down from a high level
Responding to the historic economic shock stemming (see chart 2).Given the size of the economic shock,
from the Covid-19 pandemic and social distancing liquidity concernswon’t disappear fast. Nonetheless,
restrictions, central banks around the world have moved the corporate bond market has benefited as a whole from
fast to provide ample liquidity and support their economy. the central banks’ purchases and temporary liquidity.
Even so, 2020 will be the year of the worst recession
since World War II (see our Macro Highlights section, In our view, investors are in for a multi-year hunt for higher
page 6 – 7). yielding assets in a world of low growth, sub-zero interest
rates and spiraling state debt. However, it is important
“Fallen angels” in Fed’s sights to keep an eye on the likely rise in defaults of junk debt
Adding to their already large “unconventional” toolbox, issuers as companies will have to refinance maturing debt
some central banks have adopted measures aimed at at higher rates. Moreover, the US high-yield bond market
providing direct support to the credit market. In the US, is dominated by energy companies facing trouble due to
the Federal Reserve announced plans to buy corporate the collapse in oil prices.
debt in the primary and secondary markets. It has relaxed
criteria for the purchase of securities, and the monetary
authority can now also buy exchange-traded funds that
include riskier BB-rated bonds freshly downgraded from
investment-grade, so-called fallen angels.
Chart 1: European Central Bank’s bond buying program Chart 2: Corporate credit spreads in the US have
includes high quality corporate bonds narrowed after hitting a high in March
In billions of euros Spreads bond vs benchmark in %
3000 4 12
11
2500 3.5 10
2000 3 9
8
1500 2.5 7
6
1000 2 5
500 1.5 4
3
0 1 2
22.04.2016 22.04.2017 22.04.2018 22.04.2019 22.04.2020
10.05.2018
10.08.2018
10.11.2018
10.02.2019
10.05.2019
10.08.2019
10.11.2019
10.02.2020
Corporate bonds
Covered bonds
Asset-backed securities
Government bonds US investment-grade corporate bonds
US high-yield corporate bonds (right-hand scale)
Source: European Central Bank, Refinitiv Datastream, Vontobel
Source: Bloomberg Barclays, Refinitiv Datastream, Vontobel9
Asset classes in focus
For institutional investors only / not for public viewing or distribution
Quality stocks draw attention in the crisis
— Sound balance sheets and business models
Stefan Eppenberger Sound balance sheets and strong business models – i.e.
Equity & Commodity Strategist, companies’ debt, margins, and profitability – are what
Vontobel Asset Management
counts in the crisis. By contrast, betting on future profits
of start-ups does not seem advisable at present. Among
the different regions, the euro zone stands out in a nega-
tive sense. Companies here have more debt on average
than those in the US, for example. In addition, they tend to
have rather low margins and low profitability but are none-
theless not particularly cheap. We are therefore under-
The height of the panic on the stock markets is probably weighting the euro zone within our neutral equity position.
over. However, the crisis and its aftershock will be with
us for longer. In this environment, focus should be on Healthcare sector also seems attractive
equities “with qualities” – which in our view includes The best-performing sector is technology. Companies
technology stocks in particular. By contrast, equities here have high cash holdings, i.e. no debt problems, and
from the euro zone and the energy sector do not promise leading positions with regard to profitability. Hot on their
much success at present. heels are companies from the healthcare sector, which
also appear relatively attractively valued in contrast to the
A government-mandated cash boost has brought about generally expensive technology stocks. These stocks
a recovery on the stock markets in recent weeks. The first should also benefit from increasing government spending
wave of coronavirus infections also seems to be subsiding, onhealthcare (see chart 2). We are overweighting both
allowing governments to ease the measures in place to sectors.
protect the public – and thus to give the economy addi-
tional support. Nonetheless, most companies will have to The disadvantages of many energy companies include
contend with considerably lower profits or even huge weak margins and low profitability. Another burden is the
losses in the first half of the year (see chart 1). current upheaval on the oil market. However, market par-
ticipants are probably overly pessimistic. After all, oil can-
But the financial markets are looking forwards, not back- not cost “less than nothing” for long (see commodities
wards. If there are no further shutdowns of the economy, text on page 10). We are therefore maintaining a neutral
or if they are less restrictive, then profits are also likely to positioning for energy stocks. By contrast, we are avoiding
increase again. At the same time, central banks are pro- the rather expensive stocks of companies from the utility,
viding more and more liquidity, which should also find its and consumer discretionary sectors.
way onto the equity markets. So it seems the time has
come for a neutral positioning for equities, which is why
we have abandoned our slight underweight.
Chart 1: Corporate earnings likely to plunge Chart 2: Government spending on healthcare likely
dramatically in first half of 2020 to increase – an argument for healthcare stocks
Index In % Index Annual rate in %, 12-month average
60 10 140 30
40 8 130 20
6
20 4 120 10
0 2 110 0
–20 0 100 –10
–2
–40 –4 90 –20
–60 –6 12 13 14 15 16 17 18 19 20 21 22
1985 1985 1900 1995 2000 2005 2010 2015 2020 2025 Vontobel forecast
Vontobel forecast for US GDP in 2020 US healthcare sector vs. overall US market
Earnings of US equities (total return in USD)
Real economic growth in the US (right-hand scale) Healthcare spending provided for in US budget
(right-hand scale)
Source: Refinitiv Datastream, Vontobel
Source: Refinitiv Datastream, Vontobel10
Asset classes in focus
For institutional investors only / not for public viewing or distribution
Negative oil price – another consequence
of the pandemic
— As a result of all this, oil storage facilities in Cushing, for
Stefan Eppenberger example, the biggest oil hub in the USA, were instantly
Equity & Commodity Strategist, full. The imbalance between supply and demand caused
Vontobel Asset Management
spot prices to fall below zero in mid-April (see chart 1).
On the oil futures market, a decline of USD 37 in the short-
term April contract marked the low point.
We won’t get money back at the fuel pumps
Unfortunately, we will never get money back at the fuel
pumps – not the least because taxes account for the
One big loser in the coronavirus crisis is the oil market. largest share of the gasoline price. Furthermore, there will
For the first time in history, the dramatic slump in be a consolidation among oil producers sooner or later,
demand even temporarily brought about negative if there is no market rebound. Although many companies
prices. Although oil prices should recover in the coming can survive in the short term with prices around USD 20
weeks, they are likely to remain low for a while. per barrel, this is only if they refrain from investments in
future production activity. Including such expenditure,
We have become accustomed to negative interest rates producers need a price of USD 40 to USD 50 (break-even
by now. But when oil suddenly costs “less than nothing” price) for their business to be profitable. Oil companies
due to the pandemic, the economy is really upside down. that produce at relatively high costs even in normal times
This absurd situation is due to a slump in demand esti- – particularly in the US shale oil sector – are therefore
mated at 20 – 30 million barrels per day. The speed of the likely to be squeezed out of the market when oil prices
decline is also unparalleled. are low. The US energy agency EIA also expects US pro-
duction to decrease significantly (see chart 2).
Although production has also decreased in the meantime,
this did not happen at the flick of a switch. There is still We anticipate growing demand for oil and higher prices
considerable excess supply, not least of all because Rus- this summer already, although full-to-the-brim storage
sia and the Organization of the Petroleum Exporting facilities will curb the upward trend in prices. In the
Countries (OPEC) recently boosted oil production – this medium term, supply and demand will even out again,
was in response to their failure to agree on production which is likely to pave the way for fair prices of around
cuts in March. Although the two parties have since USD 40 to USD 50.
moved closer and even agreed on a record production
cut, this comes too late and is also considerably smaller
than the slump in demand.
Chart 1: Negative oil price due to slump in demand Chart 2: Cost problems at many US shale oil companies
and glut of oil – an unprecedented situation exacerbated by low oil price
In USD per barrel Annual rate of change Annual rate of change
80 600 2.5
60 400 2.0
1.5
40 200
1.0
20 0 0.5
0 –200 0.0
–20 –400 –0.5
–1.0
–40 –600
–1.5
01.2020 02.2020 03.2020 04.2020 –800 –2.0
Spot price for oil type WTI –1000 –2.5
Three-month oil futures contract 2013 2015 2017 2019 2021
Source: Refinitiv Datastream, Vontobel Number of horizontal rigs
Growth in US oil production in mbpd (right-hand scale)
Energy Information Administration (EIA) forecast
Source: EIA, Refinitiv Datastream, Vontobel11
Asset classes in focus
For institutional investors only / not for public viewing or distribution
The Swiss franc is still one of our favorites
— We expect that the euro will need more time for a recov-
Sven Schubert, PhD ery as against the US dollar (which we are convinced will
Head of Strategy Currencies, remain weak on a longer-term basis). This would first be
Vontobel Asset Management
dependent on economic recovery in the euro zone, which
would not emerge until the second half of the year. In
addition, European governments need to find a joint solu-
tion for the costs of the current crisis. Otherwise, there is
a risk that euroskeptic parties will achieve successes,
particularly in the south of the continent, which could in
turn put the euro under pressure.
The US Federal Reserve is flooding the markets with
money at the moment. Regardless of this, the US dollar is Concerns over Brazil
holding up well, as it is benefiting from its status as a safe Emerging market currencies saw some of their big-
haven in times of crisis. There is a similar situation in Swit- gest-ever corrections in March and April, giving some of
zerland, where the franc is also showing strength overall them good opportunities over the course of the year. Par-
despite central bank intervention in the currency market. ticularly in Asia, where we anticipate faster resumption of
production, and in a few cases in Eastern Europe, we see
Over the past few months, the outlook for the US dollar recovery potential as against the dollar.
has deteriorated. The Fed’s measures to stimulate the
economy in the form of interest rate cuts and bond pur- In Latin America, the downward pressure could continue
chases are more aggressive than those of the European in the short term. Negative factors here include poorer
Central Bank (ECB, see chart 1). This should weaken the healthcare, the decline in commodity prices, and political
US currency. In the short term, however, unsettled inves- crises. In addition, countries such as Brazil can hardly
tors are still taking refuge in the dollar as a “safe haven”. afford to stimulate the struggling economy in view of their
strained budgets. Government debt in Latin America’s
Monetary authority reins in the franc biggest economy comes to 90 % of gross domestic prod-
The Swiss franc and the Japanese yen are also very pop- uct, and this ratio is likely to increase to 100 % because of
ular with investors. Like the US dollar, they are benefiting economic support measures that are already in place (see
from their perception as “crisis currencies”. However, the chart 2). For this reason, we now expect a central bank
Swiss National Bank is currently very active on the cur- bond purchase program in Brazil, too. This should limit
rency market in order to reduce the upward pressure default risks in relation to issuers of government and cor-
somewhat. For the yen, we anticipate slight recovery porate bonds. At the same time, it could temporarily fuel
potential as against the US dollar over the next few quar- the weakness of the real, the Brazilian currency.
ters, with levels around 100 (USD / JPY) possibly being
tested.
Chart 1: Aggressive measures by US Fed generally Chart 2: Brazil has highest government debt
squeezing US dollar among emerging markets
Exchange rate Index (12-month change) Government debt in 2019 * as % of GDP
1.55 1.4 100
US Fed expands
1.50 1.2 90
balance sheet faster than
1.45 European Central Bank 1.0 80
1.40 0.8 70
1.35 0.6 60
1.30 0.4 50
1.25 0.2 40
1.20 0.0 30
1.15 –0.2 20
1.10 –0.4 10
1.05 –0.6 0
Russia
Peru
Chile
Indonesia
Czech Rep.
Taiwan
Turkey
Romania
Philippines
South Korea
Thailand
Poland
Colombia
Mexico
China
Malaysia
Israel
South Africa
Hungary
India
Brazil
1.00 –0.8
2009 2010 2012 2014 2016 2018 2020
EUR / USD
Ratio of US / euro zone central bank balances
* GDP-weighted average of countries
(right-hand scale) Source: International Monetary Fund, Vontobel
Source: Refinitiv Datastream, Vontobel12
Forecasts
For institutional investors only / not for public viewing or distribution
Economy and financial markets 2018 – 2021
The following list shows the actual values, exchange rates and prices from 2018 to 2019 and our forecasts
for 2019 and 2020 for gross domestic product (GDP), inflation / inflationary expectations, key central bank
interest rates, ten-year government bonds, exchange rates and commodities.
FORECAST FORECAST
GDP (IN %) 2018 2019 CURRENT 2020 2021
Euroland 1.9 1.2 1.0 –4.9 4.9
USA 2.9 2.3 2.3 –5.5 4.0
Japan 0.3 0.7 –0.7 –5.3 2.4
United Kingdom 1.3 1.4 1.1 –4.1 4.2
Switzerland 2.7 0.9 1.5 –4.6 4.6
China 6.6 6.1 –6.8 1.5 7.4
INFLATION (IN %)
Euroland 1.8 1.2 0.8 0.7 1.8
USA 2.4 1.8 1.5 0.9 2.0
Japan 1.0 0.5 0.5 0.1 0.3
United Kingdom 2.5 1.8 1.7 1.0 1.9
Switzerland 0.9 0.4 –0.5 –0.3 1.1
China 2.1 2.9 4.5 2.6 2.0
FORECAST FORECAST
KEY INTEREST RATES (IN %) 2018 2019 CURRENT 3 MONTHS 12 MONTHS
EUR –0.40 –0.50 –0.50 –0.50 –0.50
USD 2.50 1.75 0.25 0.25 0.25
JPY –0.10 –0.10 –0.10 –0.20 –0.20
GBP 0.75 0.75 0.10 0.10 0.10
CHF –0.71 –0.69 –0.75 –0.75 –0.75
AUD 1.50 0.75 0.25 0.25 0.25
CNY 4.35 4.35 4.35 4.00 4.00
10-YEAR GOVERNMENT-BOND YIELD (IN %)
EUR (Germany) 0.2 –0.2 –0.4 –0.5 –0.3
USD 2.7 1.9 0.6 0.7 1.0
JPY 0.0 0.0 0.0 –0.2 0.0
GBP 1.3 0.8 0.3 0.5 0.8
CHF –0.2 –0.5 –0.4 –0.7 –0.5
AUD 2.3 1.4 0.8 0.6 0.8
EXCHANGE RATES
CHF per EUR 1.13 1.09 1.05 1.08 1.05
CHF per USD 0.99 0.97 0.97 0.96 0.91
CHF per 100 JPY 0.90 0.89 0.90 0.90 0.86
CHF per GBP 1.26 1.28 1.21 1.21 1.22
CHF per AUD 0.69 0.68 0.62 0.63 0.60
USD per EUR 1.14 1.12 1.09 1.12 1.16
JPY per USD 110 109 108 107 105
USD per AUD 0.70 0.70 0.64 0.65 0.66
CNY per USD 6.95 6.51 6.86 7.05 7.00
COMMODITIES
Crude oil (Brent, USD / barrel) 53 66 26 35 45
Gold (USD / troy ounce) 1281 1521 1693 1700 1800
Copper (USD / metric ton) 5949 6149 5159 5750 6250
Source: Thomson Reuters Datastream, Vontobel; closing prices for all data: 20.04.2020For institutional investors only / not for public viewing or distribution 13
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