June 2020: Market news and expert views
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“Corporate bonds should remain well
supported by the central banks’ asset
purchases. This makes them a clear
favourite on the fixed-income side.”
Christian Kopf, Head of Fixed-Income
Fund Management
June 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 The latest data on economic activity paints an even bleaker
level 3), but this time with a slightly more bullish stance. picture than we had expected. US unemployment, for exam-
We raised the equity weighting a little and, in return, slightly ple, rose even more dramatically. This is likely to hinder the
reduced the position in safe government bonds from core recovery of consumer spending in the second half of the
eurozone countries once again. In our opinion, the capital year. In many European countries, although not Germany,
markets are largely ignoring the weak economic data at the lockdown triggered a stronger fall in gross domestic
present and, instead, are focusing on news indicating that product (GDP) in the first quarter of 2020 than had been
the economic impact of the coronavirus pandemic will be generally anticipated.
overcome in the medium term.
Against this backdrop, we made further substantial down-
In the past few weeks, the further drop in the number of ward adjustments to our growth and inflation forecasts for
new infections has enabled industrialised countries to lift the current year. Initial indications are that the temporary
many of the lockdown measures. The pace and the nature suspension of public life is hitting economies harder than
of the easing of these measures varies from country to expected, especially now in the second quarter. The support-
country but the general trend is towards a gradual return ing measures adopted by governments and central banks
to a certain degree of normality. Extensive monetary and cannot prevent a severe recession but should mitigate
fiscal policy measures introduced by central banks and negative second-round effects. Limited catch-up effects
governments are also making a significant contribution to should begin to materialise from the second half of 2020,
tackling the economic impact of the coronavirus pandemic. but a sustained recovery is unlikely to set in before mid-
In addition, reports of successful tests of possible vaccines 2021. We do not expect economic output to return to
and medication to fight COVID-19 are increasing. There pre-crisis levels by the end of 2021.
are still multiple further stages of trials to be conducted,
followed by the regulatory approval process if testing is For the GDP of the eurozone, our forecast envisages a
completed successfully. But hope is growing that medical decline of 8.5 per cent for 2020. Italy and Spain, the coun-
research is swiftly advancing towards a breakthrough. tries worst affected by the pandemic, will be hardest hit by
the economic fallout. The US economy will probably also
Further support for the markets should come from system- suffer a significant slowdown in the current quarter. Unlike
atic investors in the coming weeks. As positive signals start Europe, which is more dependent on global trade, the US
to emerge, they will cautiously begin to rebuild their invest- economy is affected more severely by the collapse in con-
ments in risk assets. A continued stabilisation should trigger sumer spending. All in all, we expect US GDP to decline by
follow-up purchases. Based on the latest sentiment data, 7.0 per cent in 2020. In 2021, growth rates for economies
most discretionary investors are currently still on the sidelines on both sides of the Atlantic should return to positive
with sizeable cash allocations in hand, meaning that they, territory.
too, might gradually start to scale up their investments in risk
assets again.
Uncertain economic environment Economic slump much steeper than in the financial crisis
Global Economic Policy Uncertainty index (points) of 2008/2009
Comparison of changes in real GDP
400
104 106
350
102 104
300 100 102
98 100
250 13.3% 11.0%
96 98
slump in slump in
200 94 growth 96 growth
92 94
150
90 92
100 88 90
Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3
50
Eurozone US
0
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 Financial crisis (charted from 2007) Coronavirus shock (charted from 2018)
Source: Bloomberg, as at 20 May 2020. Source: Union Investment, as at 15 May 2020.
2The markets at a glance
Monetary policy: central banks are purchasing Fixed income: continued preference for
assets corporate bonds
Thanks to an almost complete absence of inflationary pres- On the one hand, the fiscal and monetary stimulus pack-
sure, the world’s major central banks have the necessary ages have put a floor under corporate bond yields and
leeway to take unprecedented action to mitigate the impact allowed credit spreads to narrow significantly from their
of the coronavirus pandemic on the financial system and the highs in recent weeks. We anticipate that this positive trend
capital markets, for example through extremely low or even will persist. Compared with pre-crisis lows in spread levels,
negative interest rates and a huge increase in quantitative there is still significant scope for spreads to narrow further.
easing (direct asset purchases and refinancing deals for Asset purchases by the central banks should continue to
banks). They have also reiterated frequently throughout this provide support for prices and we also expect to see further
crisis that further measures can be adopted as and when attractive new placements in the primary market. Many
the need arises. If, for example, the European Central Bank issuers are actively using the low-interest-rate environment
maintains its current rate of bond purchasing under the as an opportunity to raise finance in the capital market.
pandemic emergency purchase programme (PEPP), the
€750 billion limit will have been reached by October at On the other hand, the stimulus measures will result in a
the latest. A decision to expand the programme is therefore massive expansion of sovereign debt in the affected coun-
likely to be taken over the summer months. For now, how- tries, which should considerably boost the volume of bond
ever, the ECB will begin to pump additional liquidity into issues in the coming years. Consequently, yields on Bunds
the banking system in the coming days through new re- are unlikely to continue falling indefinitely. The German
financing operations (TLTROs). government’s most recent tax estimate projects a revenue
shortfall of nearly €100 billion for 2020 alone. And the latest
The US Federal Reserve is equally prepared to take further plans put forward by Germany and France for a European
steps if necessary. In the past few weeks, the markets already recovery fund will put additional pressure on the budgets
started to price in negative key interest rates in the US. of contributing countries.
However, such speculation was recently rejected by the Fed
chair Jerome Powell. The Federal Reserve is doubtful of the The new ECB tenders will be allotted in the coming weeks.
effectiveness of this measure based on observations made in We expect that Italian banks in particular will use this as an
other countries where negative key interest rates were prov- opportunity to refinance debt at favourable rates and to use
ing particularly damaging for the banking sector. The Fed the resulting scope for purchases of domestic government
might also issue forward guidance to provide more certainty bonds. This pattern already emerged in previous tender
for market participants. processes and resulted in narrowing spreads.
• Decision: Government bonds from core eurozone coun-
tries continued to lose appeal.
• Positioning: The attractiveness of covered bonds has
diminished slightly, that of government bonds from core
eurozone countries significantly. Investment-grade cor-
porate bonds, on the other hand, are our clear favourite
on the fixed-income side.
The ECB’s PEPP is heading towards an expansion ECB tenders should provide support for bonds from
Total asset volume purchased so far (€ billion) periphery countries
Spreads over Bunds (basis points), ten-year maturities
1,200
500
1,000
400
Volume of €750 billion exhausted
800
×
rate
300
600 nt
curre 200
the
e at
inu
400 ont 100
es c
has
purc
200 n if
jectio 0
Pro
Oct Nov Dec Jan Feb Mar Apr May Nov
0 2019 2019 2019 2020 2020 2020 2020 2020 2020
Mar Apr May Jun Jul Aug Sep Oct Nov
2020 2020 2020 2020 2020 2020 2020 2020 2020 Italy Spain Greece Portugal
Source: Bloomberg, as at 19 May 2020. Source: Bloomberg, as at 20 May 2020.
3The markets at a glance
Equities: slight preference for equities from Commodities: significant falls in production
industrialised countries
In contrast with equities, commodity prices are less sensitive
The equity markets are currently largely disregarding the to future expectations. They are generally a reflection of
downward trend in economic growth and instead drawing the prevailing economic conditions, and at present, the
strength from the fall in the number of new infections, the prices of many commodities are being depressed by high
resulting decisions to ease lockdown rules and positive news levels of supply. In the case of oil, there has been a signifi-
in connection with the development of a potential vaccine. cant decline in output, particularly in the US, where the
In addition, the stock markets are benefiting from the mas- number of active wells has been declining. But the battle
sive fiscal and monetary stimulus packages. Positioning and for market share is likely to continue. This will limit any
technical indicators could provide additional impetus. On this further recovery of the price of oil. In addition, persistently
basis, we expect the upward trend in the equity markets of high negative roll yields mean that crude oil remains unat-
industrialised countries to continue, driven primarily by tractive for many investors.
technology and healthcare sector stocks, which have so far
benefited most from this crisis. At the same time, certain Among our favourites are industrial metals and precious
companies continue to suffer severely. Among them are metals used in industry, which are likely to benefit from the
banks concerned about rising default rates and companies in easing of lockdown measures. As prices of some industrial
the aviation sector, many of whom are fighting for survival. metals have dropped below their production costs, many
extraction sites have temporarily closed. Demand in China is
At first glance, US equities appear to have been weathering already starting to pick up again as lockdown restrictions in
the crisis better than their peers. However, this is mainly due the country are being eased. But upward potential is limited
to index compositions and the high proportion of technology due to a lack of wider demand in the global market. At this
stocks in the US market. In fact, the technology-focused stage, we do not feel confident enough in the sector to
Nasdaq index currently stands at a higher level than at the increase our exposure.
start of the year. Indices such as the Russell 2000 reflect
economic conditions in the US relatively well and highlight Demand for gold for jewellery production has declined
the scale of the impact that the containment measures are sharply. Some central banks also intend to reduce their
having on the US economy. gold purchases. However, these pressures should be offset
by production outages in South Africa and, even more so,
At the same time, the performance of tech stocks clearly by the growing interest from ETF investors. Positions held in
shows that even in this challenging market phase, a range of exchange-traded funds recently climbed to a new record
business models are proving to be rather resilient. Investors high. On this basis, we have raised our target price for gold
will probably be prepared to pay a higher price for these to US$ 1,800 per troy ounce by the end of the year. By con-
securities, meaning that high valuations may well be justified trast, we feel that platinum and palladium warrant a more
despite the difficult conditions. cautious approach. We are therefore positioning ourselves
on the sidelines with regard to precious metals.
• Decision: Equities from industrialised countries reinstated
as a favourite. • Decision: None.
• Positioning: In general, equities (from both emerging • Positioning: Neutral and unchanged.
markets and industrialised countries) have regained appeal.
European equity market calms down again Oil fields are being shut as production becomes
Difference between daily highs and lows of the unprofitable
STOXX 600 index Number of active oil fields in the US since the start of 2019
900
40
800
30 700
600
20 500
400
10
300
0 200
Jan Mar May Jul Sep Nov Jan Mar May Jan Mar May Jul Sep Nov Jan Mar May
2019 2019 2019 2019 2019 2019 2020 2020 2020 2019 2019 2019 2019 2019 2019 2020 2020 2020
Source: Bloomberg, as at 20 May 2020. Source: Bloomberg, as at 20 May 2020.
4The markets at a glance
Currencies: pound sterling remains under Real estate: European office market
pressure
Demand for office space in the European real estate markets
The rekindling of solidarity between Germany and France remained high in the first quarter of 2020. Although there
is a crucial signal for the eurozone and has potential to was a year-on-year decrease in lettings, this was mainly due
strengthen the euro. But there is still a lot of convincing to be to the very short supply of available properties. Companies
done before a final agreement can be reached, especially in still found it difficult to expand because availability, espe-
conversations with northern and eastern EU member states. cially of high-end properties in central locations of major
European cities, was very limited despite a gradual increase
The huge increase in national debt and a steep slump in in completions. In this environment, vacancy rates in most
growth in the second quarter of 2020 suggest that the US European office hotspots fell or held steady year on year.
dollar might weaken. But although its decline has been The average vacancy rate for the twelve biggest European
heralded on many occasions, the greenback has been hold- office markets fell by 60 basis points to 6.5 per cent.
ing steady for weeks.
Excess demand drove up prime office rents in most locations
Pound sterling is also expected to weaken going forward. in Europe. At the end of the first quarter of 2020, average
Some voices at the Bank of England are no longer categori- prime rents for the twelve largest European markets were
cally rejecting the possibility of negative interest rates. And up by 3.3 per cent on the figure for the first three months
the still unresolved issue of Brexit will be back on the agenda of 2019. Rent rises were particularly pronounced in Lisbon,
before too long. The time frame for trade negotiations with Paris, Helsinki and Madrid.
the EU had been ambitious from the off and has now become
even tighter as a result of the coronavirus pandemic. At At the end of the first quarter of 2020, which had been
present, the virus is still dominating the headlines in the UK, upbeat in the European office markets, the worldwide
but in the second half of the year, the subject of Brexit will spread of coronavirus caused enormous disruption to social
inevitably need to be addressed. At the current point in time, and economic activity in most European countries. It is still
we are not sufficiently confident in the aforementioned too early for a conclusive assessment of the humanitarian
trends. It appears too early to take any active position and economic impact of the pandemic on the affected
because the attention of market participants is focused on countries. As a result, it is also impossible to make reliable
other influences at the moment. statements about trends in the European office markets at
this stage. In all likelihood, the office real estate segment too
• Decision: None. will see some defaults on rental payments or even the loss of
• Positioning: Neutral and unchanged. some tenants as a result of the impending recession, albeit
with some time lag. Demand for office space will weaken on
the whole, as lease decisions will be postponed due to the
Some EM currencies weakened significantly uncertainty about economic prospects.
Performance of selected currencies from emerging markets
against the euro in the year to date However, the downward price pressure resulting from the
more muted level of demand is currently being mitigated by
Taiwan dollar 2.9 limited availability of properties, high occupancy rates and
Hong Kong dollar 2.8
modest levels of new construction in most office markets.
Another feature of the office segment is the fact that many
Chinese renminbi 0.3 companies are able to continue to operate with most of
their employees working from home and that most offices
Argentinian peso – 9.9
remain open and accessible. Even though rental prices can be
Turkish lira – 10.1 expected to fall slightly in the foreseeable future, a serious
crash in the European office rental markets seems highly
Russian rouble – 12.6
unlikely.
Mexican peso – 18.5
South African rand – 21.4
Brazilian real – 28.5
Source: Bloomberg, as at 20 May 2020.
5Our assessment at a glance
Our current risk assessment RoRo meter
• The further drop in the number of new infections has
created scope for lockdown measures to be eased
significantly.
• Extensive support measures introduced by central banks
and governments are also making a significant contribu-
tion to tackling the economic impact of the pandemic.
• Reports of successful tests of possible vaccines and medi-
cation are increasing.
• Nevertheless, the global economy has been hit hard and
in many countries, economic data is looking even bleaker
than anticipated.
• Our general risk assessment (RoRo meter) remains at Source: Union Investment, as at 19 May 2020. Last changed (from 4 to 3) on
27 January 2020.
level 3 (neutral).
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 continue to be well sup- Fixed income
ported by the central banks’ purchase programmes. Many Eurozone core government bonds
governments, including those of core eurozone countries,
Covered bonds
can be expected to ramp up their borrowing in order to
Eurozone periphery government bonds
finance the significant increase in public spending.
• Equities: The equity markets are benefiting from the lifting Investment-grade euro corporate bonds
of lockdown measures, high levels of liquidity and any High-yield euro corporate bonds
kind of positive news on potential COVID-19 vaccines. Emerging market government bonds
• Currencies: The virus is pushing other significant influ-
Equities
encing factors into the background. Interdependencies
between currencies remain complex, so we would advise Industrialised countries
against taking a specific position. Emerging markets
• Commodities: The current valuations are a reflection of Commodities
the prevailing economic conditions as high levels of supply
Currencies
for many commodities are weighing on prices.
US dollar
• The situation in the money markets remains unchanged.
Interest rates remain in negative territory, which means Pound sterling
that holding cash is not a good idea. Japanese yen
• Absolute return strategies are rated neutrally in a multi- Emerging market currencies
asset context.
Absolute return
• The outlook for real estate has improved a little in
Germany but deteriorated slightly in the Asia-Pacific Cash
region. Source: Union Investment, as at 19 May 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 20 May 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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