July 2020: Market news and expert views
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“The first rally in the capital markets is
coming to an end. A continued recovery
would need to be driven by improve-
ments in the fundamental picture.”
Michael Herzum, Head of Macro & Strategy
July 2020:
Market news and
expert views
We work for your investmentThe markets at a glance
Summary Economy, growth, inflation
We reaffirmed our neutral risk positioning (RoRo meter at Data from the US Employment Situation Summary for May
level 3) once again, but shifted to a slightly more defensive was surprising in some respects, and the number of new
stance. In our opinion, the support measures adopted by unemployment benefit applications has been trending
governments and central banks and the easing of the downward for several weeks – albeit from a fairly high level.
containment measures have been widely priced in now. But according to our economists, the unexpected rise in jobs
Further price gains would need to be driven by improve- is largely attributable to a one-off effect linked to the govern-
ments in the fundamental market environment. This means ment’s Paycheck Protection Program (PPP). An important
that risk assets will remain attractive over a longer horizon. cut-off date in connection with the support programme fell
But in the short term, opportunities and risks are balanced into this reporting period for labour market data: Companies
relatively evenly owing to a strong rally and – by now that opted to protect at-risk jobs up to this date received the
– high valuations. payments under the PPP not as a loan but as a non-repayable
grant. It is therefore unsurprising that a particularly high
Global economic activity has started to pick up amid the number of applications were filed before this cut-off date.
easing of lockdowns but still remains well below pre-crisis
levels. China is the only economy that has returned to its The rise in US retail sales in May (up by 17.7 per cent com-
2019 level and is therefore well ahead of the rest of the pared with the previous month) should also be interpreted
world. The capital markets, however, are still ignoring the with caution. Despite the high level of unemployment, many
weakness of the global economy and the rising numbers US households are currently finding themselves with more
of new infections in many places over the past few days. cash than before the crisis. This is due to temporary one-off
Instead, investors are focusing on positive news, such as effects (time-limited additional support for the unemployed,
the latest US labour market and consumer spending figures, rules allowing households to defer rent and electricity bill
and any indications that the economic impact of the corona- payments, special payments from the government).
virus pandemic will be overcome in the medium term.
Against this backdrop, our economists have reaffirmed their
Even though the numbers of new COVID-19 infections in growth and inflation forecasts from last month, both for the
European countries have been falling sharply for several current year and also largely for 2021. The support measures
weeks, making it possible to reduce containment meas- introduced by governments and central banks cannot
ures, the peak of the coronavirus crisis still lies ahead from prevent a severe recession but should mitigate negative
a global point of view. The epicentre has shifted mainly second-round effects. Limited catch-up effects should begin
to Latin America (e.g. Brazil, Chile, Peru) and a few other to materialise from the second half of 2020. It will take until
major emerging markets. In industrialised countries, the mid-2021 for a sustained recovery to set in, which should
risk of a second wave of coronavirus is rising in light of new see US growth recover to 3.6 per cent for 2021 as a whole
localised outbreaks. The US, in particular, has recently seen (previous forecast: 2.8 per cent). We do not expect economic
a significant rise in the number of daily new infections at output to return to pre-crisis levels before 2022.
national level.
Substantial upturn in the markets compared with lows US: disposable income lifted by one-off effects
recorded in March 2020 Rise in income – fall in consumer spending,
Performance (%) year-on-year change (%)
Germany 45.3
Eurozone 35.9
15
US 39.4
10
Japan 35.5
China 16.2 5
Emerging markets 29.0
0
Bunds 1.0
Euro government bonds 4.0
–5
Euro corporates 6.4
Euro high yield 18.1 – 10
EM government bonds* 19.9
– 15
Brent crude oil 90.9
Gold 19.1
– 20
Copper 26.7
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
Equities Bonds Commodities Disposable income Consumer spending
Source: Refinitiv, as at 22 June 2020. * Hard currencies. Source: Macrobond, as at 23 June 2020.
2The markets at a glance
Monetary policy: support programmes are Fixed income: periphery bonds overweighted,
being further expanded covered bonds reduced
In recent weeks, the world’s major central banks have reaf- The central banks’ purchase programmes are continuing to
firmed, and in some cases widened, their expansionary provide strong support for the bond markets, with govern-
monetary policy programmes to mitigate the impact of the ment bonds from eurozone periphery countries and corpo-
pandemic on the financial system and the capital markets. rate bonds particularly benefiting. A European recovery
The Federal Reserve (Fed) will continue to purchase US fund is likely to be established in one form or another,
Treasuries (US$ 80 billion) and mortgage-backed securities which will probably also cause yields to fall in periphery
(MBSs, US$ 40 billion) at least at the current monthly volume. markets. Default rates are expected to remain in check in
In addition, the bank has switched from using exchange- the investment-grade segment, even if a second wave of
traded funds (ETFs) to making direct purchases of corporate coronavirus emerges. It seems likely that yield spreads will
bonds. Decisions about expansion of the bank’s quantitative contract further in an environment of continued economic
easing measures will probably not be taken until its next recovery. In terms of yields, both periphery bonds and
meeting in September. The introduction of a cap on yields investment-grade corporate paper should remain of interest
(yield curve control) also remains an option at the Fed’s to safety-oriented investors. But it remains unforeseeable
disposal. Interest rates in the US are unlikely to be raised at this stage how far default rates are likely to rise in the
before the end of 2022. high-yield segment over the coming months and what
impact the spread of coronavirus in Latin America and other
The European Central Bank (ECB) increased its pandemic emerging markets will have on bonds from these regions.
emergency purchase programme (PEPP) by €600 billion in As risk premiums have contracted significantly in these two
June to a total volume of €1.35 trillion and extended the bond market segments, we retain a neutral view of both.
period for bond purchases until at least the end of June Low yields combined with sluggish issuance activity and mild
2021. Based on current purchasing volumes, this will provide upward pressure in the swap markets make the covered
the bank with room for manoeuvre until the end of the first bond market relatively unattractive.
quarter of 2021. The surplus reserves of eurozone banks
held at the ECB have increased significantly since the intro- • Change: Covered bonds have become even less appealing
duction of tiered interest rates. It is expected that the factor due to low yields, including in comparison with market-
used to calculate non-interest-bearing surplus reserves will neutral absolute return investments. Government bonds
be raised at the next meeting of the ECB Governing Council. from eurozone periphery countries are among our
Eurozone banks used the new targeted longer-term refi- favourites again.
nancing operations (TLTROs) in mid-June to obtain more • Positioning: Covered bonds and core eurozone govern-
than €1.3 trillion of liquidity from the ECB. ment bonds are unattractive. Our current preference on
the fixed-income side is for investment-grade corporate
bonds, followed by government bonds from the eurozone
periphery.
Fed’s balance sheet will continue to expand Spreads on euro corporate bonds are expected to
Total assets on the Fed’s balance sheet (US$ billion) narrow further
Swap spreads (basis points)
8,000
250
7,000
6,000 200
5,000
150
4,000
Forecast up to
3,000 30 June 2021
100
90
2,000
50
1,000
2017 2018 2019 2020
0
2018 2019 2020 2021
Long-dated US Treasuries Treasury bills Other positions
Source: Macrobond, as at 23 June 2020. Source: Bloomberg, as at 22 June 2020.
3The markets at a glance
Equities: exposure to equities from industrial- Commodities: oil market back in equilibrium,
ised countries neutralised but with an inventory surplus
The global equity markets have continued to recover in Thanks to the extension – and strict implementation – of
recent weeks. But in light of severe profit slumps in many the restrictions on OPEC+ countries’ output and the rapid
sectors of the economy, valuations (e.g. price/earnings ratios) curtailing of production by shale oil companies in the US,
are currently quite ambitious. The easing of lockdowns and the global supply of oil has been brought down to the level
the enormous support packages adopted by governments of global demand. The oil market will therefore start the
and central banks have already been priced in. The risk of a second half of the year in a state of equilibrium. But signifi-
second wave of infections remains, but in our opinion, this cant excess volumes in storage due to weak demand in
would not result in the renewed implementation of country- recent months should keep prices down. The recovery in
wide containment measures like those taken in response to demand for oil has been slow in recent weeks, both in the
the initial outbreak. Nevertheless, rising levels of infections US and in other parts of the world.
would likely put a damper on economic activity at least at
a local level, either in the form of fresh restrictions imposed Exchange stock levels of industrial metals have recently
by public authorities or through adjustments in the behav- stabilised. But we expect weak global demand to result in
iour of consumers and companies (Apple, for example, has a market surplus of aluminium, lead and zinc. Iron ore was
decided to close its shops again in severely affected US states). the only metal that defied the weak economic environment
As mentioned before, certain positive trends in economic thanks to high production levels in China. In the market for
data should furthermore be critically examined. It can be precious metals, gold remains well supported thanks to
expected that the global economy will take quite a while to unabated demand from ETFs and low real rates of return.
recover from this deep recession. The recent rally in value Weak demand from the jewellery sector continues to be
stocks will probably also lose momentum soon because more than offset by substantial interest from investors.
economic and profit growth are simply still too weak.
Moreover, the tailwind provided by systematic investors, who All in all, the fundamental outlook for the commodities
had been increasing their equity weightings substantially in asset class as a whole is relatively muted. Prices are currently
recent weeks, is diminishing. Profit levels have recently moving largely in line with general sentiment in the capital
stabilised but are likely to recover only slowly. Against this markets and are showing limited momentum of their own.
backdrop, we have decided to collect profits on equities from The cyclical segments of energy commodities and industrial
industrialised countries and take a tactical position on the metals tend to strengthen when risk sentiment picks up,
sidelines for the time being. Strategically speaking, however, while precious metals, especially gold, benefit from bleaker
equities remain a preferred asset class. conditions. This does not provide a sufficient basis for any
specific investment recommendation within the commodi-
• Change: We are lowering our assessment of equities from ties asset class. We are therefore maintaining our neutral
industrialised countries to neutral. positioning for the time being.
• Positioning: Overall, equities are now weighted neutrally
again as well. • Change: None.
• Positioning: Neutral and unchanged.
Value stocks have limited scope for a sustained recovery Demand for oil still well below pre-crisis levels
Indexed performance, 13 May 2020 = 100 Millions of barrels per day
105
140
100
130
95
120
110 90
100 85
90
80
80
75
70
Jan Feb Mar Apr May Jun 70
2020 2020 2020 2020 2020 2020
65
MSCI World Value index MSCI World Growth index 2015 2016 2017 2018 2019 2020
Source: Bloomberg, as at 22 June 2020.
Source: Bloomberg, as at 23 June 2020.
4The markets at a glance
Currencies: favourable assessment of the euro Real estate: office markets in Asia
The inclusion of the proposal from German Chancellor Merkel In the first quarter of 2020, investor demand for real estate
and France’s President Macron in the European Commission’s in the Asia-Pacific region remained high. At the end of
draft for a recovery fund is creating a continued tailwind March 2020, the twelve-month rolling transaction volume
for the euro. But the support measures proposed by the for commercial property stood at €139.3 billion, a very good
President of the Commission, Ursula von der Leyen, actually result but still 9.4 per cent below the corresponding figure a
go far beyond this, while also including concessions to those year earlier. The decline is mainly attributable to a growing
EU member states opposed to the mutualisation of debt. An shortage of properties offered for sale. Nevertheless, Tokyo
agreement at the EU summit taking place this weekend could was among the global top ten cities with the highest trans-
pave the way for further steps towards closer integration and action volume in the first quarter of 2020. With a transaction
thereby strengthen the euro. But these negotiations are not volume of €8.7 billion, the Japanese capital ranked higher
going to be easy. than New York (€8.3 billion) and London (€5.4 billion).
Another Asian hotspot was also represented in the top ten,
First signs of common ground in the Brexit negotiations which was otherwise largely dominated by US locations:
emerged in recent weeks and sent another positive signal Seoul came seventh with a transaction volume of €3.9 billion.
from Europe that should benefit both the euro and pound
sterling. But the time frame for negotiations with the EU is Although many new construction projects reached comple-
limited and has become even tighter as a result of the corona- tion in office markets in the Asia-Pacific region during the
virus pandemic. In addition, the way in which Boris Johnson first quarter, vacancy rates fell in a number of locations due
and his government handled the virus outbreak did not to high demand for office space. The average vacancy rate
compare favourably with the actions of politicians in other for the region’s four biggest office markets remained broadly
European countries. stable year on year at 5.5 per cent. The decline in vacancy
rates in Seoul, Singapore and Tokyo ranged from 0.3 to
The US dollar is likely to be adversely affected by outflows of 2.7 percentage points. In Sydney, however, the proportion
capital from the US, as interest-rate cuts implemented by of vacant office properties rose by 3.9 percentage points to
the Fed are prompting investors to look for more profitable 7.5 per cent as a result of completions.
investments elsewhere. Economic conditions and public debt
levels are not favourable for the greenback either. And devel- In light of high demand for office space from companies
opments in the US election campaign can also be expected and increasingly scarce supply, prime office rents across the
to increasingly buffet the currency. four aforementioned hotspots climbed by 2.4 per cent year
on year. Tokyo was the top performer with rents going
• Change and positioning: Short position in US dollars up by 4.1 per cent, followed by Seoul with a 2.0 per cent
(–1 percentage point) vs. long position in the euro increase. Rents in Sydney rose by 1.8 per cent despite the
(+1 percentage point). higher vacancy level and rents in Singapore advanced by
1.6 per cent.
At the end of the first quarter of 2020, countries in the
Euro well supported Asia-Pacific region were also affected by the global spread
Exchange rate: US dollars to the euro of coronavirus and imposed significant restrictions on public
life and economic activity. It is not yet possible to reliably
1.16
assess the scale of the likely impact on these economies and
their real estate markets. But it seems reasonable to expect
1.14
that office markets in this region will also be affected by
defaults on rental payments or even the loss of some tenants.
1.12
However, in light of the robust starting position of Asia’s
office hotspots, a sharp crash in these rental markets seems
1.10
relatively unlikely.
1.08
1.06
Jan Mar May Jul Sep Nov Jan Mar May
2019 2019 2019 2019 2019 2019 2020 2020 2020
Source: Bloomberg, as at 23 June 2020.
5Our assessment at a glance
Our current risk assessment RoRo meter
• The easing of lockdowns and the enormous support
packages adopted by governments and central banks
have already been priced in.
• Further price gains would need to be driven by improve-
ments in the fundamental market environment.
• Global economic activity recently started to recover but
is unlikely to return to pre-crisis levels before 2022.
• Globally, we have not yet reached the peak of the corona-
virus pandemic. The epicentre has shifted primarily to
Latin America.
• Our general risk assessment (RoRo meter) remains at
level 3 (neutral). Source: Union Investment, as at 23 June 2020. Last changed (from 4 to 3) on
27 January 2020.
Note: The investment strategy is established by first closely analysing the
market environment. The result is reflected in a risk rating. For this, the
Union Investment Committee (UIC) expresses a risk-on/risk-off decision
at one of five levels (1, 2, 3, 4 or 5). It is to be interpreted as follows: a ‘5’
indicates a strong appetite for risk while a ‘1’ indicates a general
withdrawal from risk assets.
Our view of the asset classes Appeal of different asset classes
• Fixed income: Corporate bonds and government bonds Fixed income
from the eurozone periphery continue to be well supported Eurozone core government bonds
by the ECB’s purchase programmes. Covered bonds and
Covered bonds
government bonds from core eurozone countries are not
Eurozone periphery government bonds
very attractive due to low yields.
• Equities: Government and central bank support measures Investment-grade euro corporate bonds
and steps to ease the lockdowns have already been priced High-yield euro corporate bonds
in. A further upward trend in prices would need to be Emerging market government bonds
driven by improvements in fundamental data.
Equities
• Currencies: Political rapprochement in Europe (recovery
fund, Brexit) is supporting the euro. Industrialised countries
• Commodities: The oil market is back in equilibrium thanks Emerging markets
to the extension and strict implementation of the OPEC+ Commodities
production cuts and a drop in the supply of shale oil, but
Currencies
inventory levels remain high.
US dollar
• The situation in the money markets remains unchanged.
Interest rates are still in negative territory, which means Pound sterling
that holding cash is not a good idea. Japanese yen
• In light of low yields in the bond market, we are taking Emerging market currencies
a positive view of absolute return strategies.
Absolute return
• The outlook for real estate has improved a little in Germany
but deteriorated slightly in the Asia-Pacific region. Cash
Source: Union Investment, as at 23 June 2020.
Note: The table above provides a relative view of a multi-asset portfolio
(excluding real estate). If one asset class becomes more strongly favoured,
a lower level of investment in another asset class is required in return. The
latter would then be classified as less favoured – or vice versa. Real estate is
excluded from this analysis.
Real estate
The signs indicate the change compared with the decision made
at the UIC’s previous regular meeting. Germany
Europe (ex Germany)
Not favoured Strongly favoured
Neutral US
Asia-Pacific
Source: Union Investment, as at 15 June 2020.
Note: The table above provides a relative view of the office real-estate
markets in light of current market prospects. Due to a lack of more frequently
available data, it is only updated every six months.
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