THE ADVENT OF LENT HOUSE VIEW - MARCH 2020 - Banca March
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HOUSE VIEW MARCH 2020 THE ADVENT OF LENT
HOUSE VIEW. MARCH 2020
THE ADVENT OF LENT
The markets were down by almost 14% as Lent began, in their worst week since 2008. Volatility has spiked to
similar levels to the Greek debt crisis in summer 2011, and 10-year US treasury yields have dipped to a record
low of 1.03%. Like the seven trumpets of Revelation heralding the seven bowls of God’s wrath, the coronavirus
appears to be spreading, as if poured from the bowl of the seventh angel. Covid-19 is highly contagious; ten
times more contagious than SARS, which wreaked tragedy over 17 years ago. However, it would appear that its
mortality rate is three times lower than that of SARS, and it is only particularly lethal to a very specific segment
of the population: people who are immunocompromised, or who suffer with chronic illnesses, certain types of
cancer or pulmonary disease. So is all the panic really justified?
It is true that in the last five months, equities have not registered a single correction. It is also true, however,
that despite the significant downturn, share prices are still at September 2019 levels, and that initially, after the
outbreak of COVID-19 was announced, developed market equities chalked up new record highs. These factors, in
addition to the proliferation of algorithmic management systems, have accelerated the speed of market losses.
Paradoxically, whilst the transmission rate is slowing in China and the speed at which people are returning to work
has improved substantially, to an average of around 60%, the stock market impact was triggered by contagion in
countries like Italy, South Korea and Iran.
1. CHINA: RATE OF RETURN TO WORK
Source: Bloomberg and Banca March
12.0 100
GDP, Trillion Yuan
Percent, Rate of Return to Work
10.0 80
Weighed Average Rate of
Return to Work: 66,89 %
8.0
60
6.0
40
4.0
20
2.0
0.0 0
Guangdong
Jiangsu
Shandong
Zhejiang
Sichuan
Hunan
Hebei
Fujian
Shanghái
Beijing
Anhui
Liaoning
Jiangxi
Guangxi
Tianjin
Yunnan
Mongolia interior
Shanxi
Heilongjiang
Jilin
Guizhou
Ningxia
Qinghai
Nominal GDP Rate of Return to Work (%)
The fear gripping the markets and the economy is rooted not so much in the health crisis itself, but in speculation
over the quarantine measures that could be put in place globally to mitigate transmission of the virus.
The events which are currently unfolding will undoubtedly have a negative impact on economic growth, just as the
global economy was beginning to recover from the weakest phase in the cycle. It is still difficult to gauge the real
impact that the halt in Chinese production will have on global companies, where supply chains, now more than ever,
are fully integrated. It also remains to be seen how long it will take for consumer spending to rally as mass hysteria
continues to escalate, and what the impact will be on demand from Chinese consumers, who – as we explained
last month in “Health crises, the economy and the markets” – now account for ¾ of GDP growth and over half
of all employment. Currently, China’s large-scale quarantines are set to shave -0.5% off its growth; assuming that
production is resumed over the course of the next month, the upturn in global growth will be delayed until at least
the third quarter of the year. However, we believe it would be premature and extreme to conclude, based on the
data currently available, that we are headed for a global recession.
THE ADVENT OF LENT 2HOUSE VIEW. MARCH 2020
If the trend has not changed, and we do not think it has, then we are simply looking at a “normal” correction
within an upward economic cycle. It is interesting, then, to analyse how the US market has performed in past
corrections. Table 1 shows the pattern of downturns in the US market throughout the market cycle over the last
eleven years; any shocks have been tempered with additional monetary stimulus and government support, which
is likely to be the case again this time.
We are currently looking at the 13th market correction, and it has almost doubled the median weekly loss of
8.2%. It appears to be steeper than previous downturns; on average, the market takes 10 weeks to bottom out
and another 11.5 weeks to recover previously recorded highs.
TABLE 1. S&P 500 CORRECTIONS IN THE CURRENT BULL MARKET
Source: Bloomberg and Banca March (*) Weekly figures
No. of weeks No. of weeks taken to
Corrections >5% % loss from high
taken to reach low recover to previous high
2009 Q3 4 -7.1% 2
2010 Q1 4 -6.9% 5
2010 Q3 10 -16.0% 18
2011 Q3 22 -17.0% 21
2012 Q2 9 -9.3% 11
2012 Q4 9 -7.2% 7
2014 Q3 4 -6.2% 2
2015 Q3 30 -12.3% 21
2018 Q1 10 -9.3% 20
2018 Q4 13 -17.5% 18
2019 Q2 4 -6.6% 3
2019 Q3 4 -5.9% 10
2020 Q1 2 -12.6% ?
Average 10.3 -10.1% 11.5
Median 9.0 -8.2% 10.5
Since the virus began to spread, coinciding closely with the advent of Lent, Covid-19 lockdowns have been
implemented outside of China. For Christians, Lent is a period of sacrifice, forgiveness and reflection which lasts
until Maundy Thursday. During the period, investors will need to apply a very similar approach: we know that it is
impossible to pinpoint the exact moment when the market bottoms out, so we must – cautiously – harness the
opportunity to raise exposure. Until a couple of full Covid-19 incubation periods have passed, we will not know
whether the rate of contagion outside of China has begun to slow, as it has in the Asian country itself. Based on
the patterns registered in previous corrections, we are likely to see ongoing volatility and mass hysteria until the
end of Lent. What sets this correction apart from the rest, however, is that it has moved extremely quickly.
Joan Bonet Majó
Chief Investment Strategist, Banca March
THE ADVENT OF LENT 3HOUSE VIEW MARCH 2020 CORONAVIRUS TO DELAY ECONOMIC RECOVERY
HOUSE VIEW. MARCH 2020
HOW SHOULD WE POSITION OURSELVES
IN THE CURRENT LANDSCAPE?
Coronavirus to delay economic recovery
ASSET ALLOCATION
ASSET CLASS -2 -1 NEUTRAL +1 +2
LIQUIDITY
FIXED-INCOME
EQUITY
ALTERNATIVE
FIXED-INCOME -2 -1 NEUTRAL +1 +2
SOVEREIGN DEBT
High quality (AAA)
Peripheral
CORPORATE BONDS
Investment Grade
High Yield
EMERGING DEBT
CONVERTIBLE BONDS
EQUITIES -2 -1 NEUTRAL +1 +2
EUROPE
United Kingdom
UNITED STATES
EMERGING
REST OF THE WORLD
CURRENCIES -2 -1 NEUTRAL +1 +2
U.S. DOLLAR
STERLING POUND
MACROECONOMIC LANDSCAPE
The complexity of quantifying the economic impact of Covid-19 has aggravated
market uncertainty and fuelled fears of a major global economic slowdown.
The spread of the coronavirus outside China in the second fortnight of February heightened fears of global
contagion. New contagion hotspots in countries as far-flung as South Korea, Italy and Iran have sparked doubts
around the world’s capacity to contain the virus, and particularly around the potential economic impact of the
quarantine measures needed to stop it spreading further. Over the last few weeks there have been periods of
extreme tension in the financial markets, with some assets starting to price in a severe slowdown. In certain
specific cases, such as sovereign debt, current levels even appear to be pricing in an economic contraction.
CORONAVIRUS TO DELAY ECONOMIC RECOVERY 5HOUSE VIEW. MARCH 2020
Covid-19 is not the first health crisis in recent years; in fact, it is not even the first coronavirus. Some of the main
examples from the last 20 years are Severe Acute Respiratory Syndrome (SARS) in 2002 which originated in
China and spread to Hong Kong and Vietnam, Swine Flu in 2009, Middle East Respiratory Syndrome (MERS) in
2013, located mainly in the Middle East and Korea, and multiple outbreaks of bird flu. These past health crises
also drove up market volatility and stymied global growth, but did not alter the trajectory of the economic cycle.
Will this time be different?
1. GLOBAL COVID-19 DIAGNOSES 2. CHINA IN THE GLOBAL ECONOMY
Source: Bloomberg and Banca March Source: Oxford Economics and Banca March
100000 COVED - 19 100% % of the total
(cases worldwide)
90000 90%
18
80000 80%
16
70000 70%
14
60000 60%
12
50000 50%
10
40000 40%
8
30000 30%
6
20000 20%
4
10000 10% 2
0 0% 0
22-jan. 27-jan. 1-feb. 6-feb. 11-feb. 16-feb. 21-feb. 26-feb. 2-mar.
GDP Total imports Intermediate exports
Confirmed, global Cases outside China % daily growth (right axis) (exc. food and energy)
2003 2018
What we know about Covid-19 so far is that it has an incubation period of up to two weeks, it is highly contagious
and it can be transmitted even before the infected person is symptomatic. To date, Covid-19 has infected 11 times
more people than SARS did in 2002, but its mortality rate stands at around 3%, versus 9.6% for SARS. As for
the infection rate, the good news is that new infections in China appear to be slowing on the back of the decisive
restrictive measures taken by the authorities; last week, the average daily increase in newly-infected people stood
at 0.5%. However, whilst the proportion of infections outside of China remains relatively low at 14% of the total,
the rate of new infections is speeding up (graph 1).
The inherent characteristics of this health crisis mean it is extremely complex to quantify, for two reasons. Firstly,
we do not know what containment measures different countries will put in place, or – even more importantly –
how long these restrictions will be in place for. Secondly, as graph 2 reveals, the size of China’s contribution to
the global economy is far greater now than it was at the time of the SARS outbreak (2002-2003), which means a
longer-than-expected paralysis of the Chinese economy would lead to shortages in global supply chains (graph 3).
3. CHINA IN PRODUCTION CHAINS 4. CHINESE COAL CONSUMPTION
Source: OECD TiVa, Oxford Economics and Banca March Source: OECD TiVa, Oxford Economics and Banca March
China intermediate goods exports (% total production, sector)
Electronics
Electrical equipment
Thousands of tonnes
Textiles
Non-metallic minerals 900
Chinese New Year
Basic materials
800
Plastic and rubber
700
Metal products manufactured
Industrial machinery 600 Range of consumption
2017-2019 -36%
Manufactures
500
Chemicals and pharmaceuticals
400
Other transport equipment
Consumption 2020
Motor vehicles and components 300
-32 -28 -24 -20 -16 -12 -8 -4 0 4 8 12 16 20 24 28
0% 2% 4% 6% 8% 10% 12% 14%
Days before / after
CORONAVIRUS TO DELAY ECONOMIC RECOVERY 6HOUSE VIEW. MARCH 2020
As quarantine measures are pared back in China, it is fair to expect economic activity to gradually normalise. This
uptick, however, is proving slow to materialise; for example, China’s coal consumption (graph 4) is still 36% lower
than the average of the three previous years.
Our baseline scenario is that the Covid-19 crisis will delay the global economic recovery, but
will not impede it completely…
Against this backdrop, we believe that time is the key variable to allow us to estimate the potential final economic
impact of this health crisis. In similar situations in the past, such as the SARS outbreak, the impact on China’s GDP
growth was temporary and globally, the effects were negligible. Increased spending on infrastructure and other
measures to support consumer spending allowed the Asian economy to recover from the dip in economic activity.
As we have argued before, the current position in the economic cycle and the increased global importance of
the Chinese economy mean that the Covid-19 outbreak is not necessarily comparable with past health crises.
However, we do think it is reasonable to expect a similar growth performance if the epidemic is contained in
the next few months, as we are beginning to see in China. In the absence of new official data and based on the
information available, it would be premature to consider a scenario involving a worldwide pandemic and resulting
global economic recession.
We are therefore considering two potential scenarios depending on the point at which, hypothetically, the rate
of new infections reaches a peak (Q1 or Q2 this year), at which point the extraordinary measures rolled out to
contain the virus will be withdrawn and, subsequently, activity in the main economies will begin to normalise.
5. CHINA GDP 6. GLOBAL GDP
Source: Oxford Economics and Banca March Source: Oxford Economics and Banca March
8.0 4.0
Chinese GDP forecasts Global GDP forecasts
(YOY) (YOY)
7.0 3.5
6.0
3.0
5.0
2.5
4.0 Activity resumed Q2
Activity resumed Q2
2.0 Activity resumed Q3
Activity resumed Q3
3.0
December 19 December 19
2.0 1.5
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
2019 2019 2019 2019 2020 2020 2020 2020 2021 2021 2019 2019 2019 2019 2020 2020 2020 2020 2021 2021
As evidenced by graphs 5 and 6, the point at which the number of new infections stops growing is a key variable.
If this point is reached in Q1 and the data shows Chinese economic activity picking up as of Q2, it is fair to expect
that the negative impact on its growth will be very temporary, with year-on-year growth rates returning to +6%
in the second half of 2020. Confidence levels would jump quickly and the need to reposition inventories would
drive up demand. In this scenario, we believe the downside impact on global GDP would also be very limited.
In the second scenario – the least positive – we assume that the number of new infections continues to rise
throughout Q2 and restrictive measure cannot therefore be lifted in the short term. In this case, economic activity
in China and globally would only be expected to recover as of Q3. GDP growth would continue to slow and the
expected economic upturn would not materialise in 2020.
CORONAVIRUS TO DELAY ECONOMIC RECOVERY 7HOUSE VIEW. MARCH 2020
... among other reasons, because monetary and fiscal stimulus measures will remain in place.
6. DISCREPANCY VS ESTIMATES DEC ‘19 As things currently stand, it seems clear that the
Source: Oxford Economics and Banca March shock generated by Covid-19 will delay the expected
upturn in the Chinese and global economies until at
0.0
least Q2, which means growth will be lower than was
-0.2 forecast at the end of last year (see graph 6).
-0.4
-0.6
-0.8 Activity resumed Q2
-1.0 Activity resumed Q3
-1.2
China World
The intensity of the slowdown will depend on how long the epidemic lasts and on the extraordinary measures
put in place to contain the virus. We believe this weaker growth for the Chinese economy, added to the negative
impact on global production chains and the drop in confidence levels, will shave a few tenths of a percentage
point off of global growth, but will not completely wipe out the economic upturn expected in the second half of
the year.
Among other factors, as we have witnessed in recent weeks, the Chinese authorities are responding decisively
and the number of new cases in the country is falling. At the same time, from an economic perspective, we
expect to see new fiscal stimulus measures put in place to complement the monetary stimulus measures already
announced by various other countries.
CORONAVIRUS TO DELAY ECONOMIC RECOVERY 8HOUSE VIEW. MARCH 2020
CENTRAL BANKS AND FIXED INCOME
Central banks come to the rescue once again to mitigate the risk of a global economic
slowdown and worsening financial conditions.
After a difficult end to the month of February, central banks were quick to react to the deteriorating financial conditions
and fears of a recession sparked by the global spread of the coronavirus. This health crisis seems to be progressing at
two different speeds – one in China and one in the rest of the world. On 3 March, the Fed announced an emergency
move to cut its benchmark rates by 50-bps. This surprise measure by the Fed was taken outside of the regular meetings
scheduled by the US central bank, and was the first time it has made a decision of this kind since 2008.
The corresponding statement and subsequent press conference were also kept very brief. The Fed explained that the
US economy continued to perform well but that its outlook for the months ahead had changed due to the potential
negative effects of the coronavirus. The Fed’s liquidity injections into the money markets, intended to avoid a tightening
of financing conditions in the short term, remain untouched and will continue at least throughout the first half of the
year. As shown in graph 7, futures are pricing in even greater cuts over the course of 2020 and reaching levels as low
as 0.5%.
7. US SHORT-TERM INTEREST RATE FUTURES
Source: Bloomberg and Banca March
2.5 30-day Fed funds futures
2
1.5
1
0.5
0
mar.-20 aug.-20 jan.-21 jun.-21 nov.-21 apr.-22 sep.-22 feb.-23
30-day Fed funds futures 30-day Fed funds futures on 31/12/2018 30-day Fed funds futures on 3/2/20
Other monetary authorities followed suit, including the Reserve Bank of Australia, which slashed its benchmark rates by
25 bps to 0.5%, a new record low. In the last few days, the Bank of Japan announced on 1 March that it would provide
ample liquidity through its asset purchases and the Bank of England said on 3 March that it too was prepared to act,
reiterating that it still has room to move.
In China, which was the first economy to feel the effects of the coronavirus, the central bank rolled out support
measures in the first half of February just after the Chinese New Year, with an extraordinary liquidity injection, a cut to
the seven-day reverse repurchase rate and cuts to the benchmark one- and five-year rates.
After the virus spread to countries outside Asia, and particularly to European countries, central banks around the world
moved in unison and once again demonstrated their commitment to defending financial stability. With this in mind, we
remain firm in our outlook that central banks will take further action and their stimulus measures will buoy economies,
and that they will seek, above all, to avoid a severe decline in global financial conditions.
CORONAVIRUS TO DELAY ECONOMIC RECOVERY 9HOUSE VIEW. MARCH 2020
Against the current backdrop of substantial uncertainty, lower growth expectations and rate cuts by central banks,
the best-rated sovereign debt has benefited from its status as a safe haven. Yields on 10-year US Treasuries are down
to 0.9%, and yields on 10-year German Bunds have fallen to -0.6%. This is the lowest the 10-year Treasury yield has
fallen in history.
Risk aversion has driven credit spreads wider; the lowest-rated companies and the sectors
that are most exposed to virus containment measures are being hit hardest.
Since the second half of February, credit spreads have widened substantially at the global level, as reflected in graph
8. Lower-rated corporate debt underperformed, whilst the major reduction in long-term sovereign rates offset the
widening spreads on high-rated (investment grade) corporate debt.
8. CREDIT SPREADS 9. GLOBAL CREDIT (IG VS. HY)
Source: Bloomberg and Banca March Source: Bloomberg and Banca March
4 8 104
7
103
3
6
102
5
2 101
4
100
3
1
2 99
0 1 98
16 17 18 19 20 31-dec.-19 20-jan.-20 9-feb.-20 29-feb.-20
Investment grade (left) High yield (right) EM sovereign ($, right)
Investment grade (IG) High yield (HY)
In US high yield bonds – the lowest-rated segment – the issuers that have been hit hardest are energy and transport
companies, credit spreads in these sectors have soared by 330 pbs and 280 pbs since January, respectively. Investors
expect demand to tail off in both sectors, which could hamper the ability of these companies to meet their debt
payment obligations over the coming months. To demonstrate the significance of this shift, it is worth highlighting
that we have not seen spreads like these in the energy sector since Q2 2016, after the dramatic drop in oil prices to
around $40 a barrel for Brent Crude.
10. US HIGH YIELD PERFORMANCE BY SECTOR YTD
Source: Bloomberg and Banca March
Spread
Current Current Energy -7.58
Sector increase
spread IRR (%) Transport -1.82
YTD
Energy 317 962 10,7 Industry -0.79
Transport 208 668 7,7 US High yield -0.49
Industry 148 495 6,0 Utilities -0.33
US High yield 141 477 5,9 Consumer disc. -0.27
Consumer disc. 134 422 5,3 Capital goods 0.23
Consumer staples 98 416 5,3 Financials 0.48
Telecommunications 107 420 5,2 Technology 0.49
Capital goods 117 385 5,0 Consumer staples 1.22
Technology 141 377 4,9 Telecommunications 1.25
Financials 127 369 4,8
-12.00 -8.00 -4.00 0.00 4.00
Utilities 123 358 4,7 Yield 2020
CORONAVIRUS TO DELAY ECONOMIC RECOVERY 10HOUSE VIEW. MARCH 2020
Emerging market debt in hard currency managed to partially withstand the increase in risk aversion
thanks to its exposure US sovereign rates.
EM debt in hard currency remained relatively stable over the month, buoyed by the base rate cut which largely
mitigated the increase in sovereign credit spreads. Year to date, credit spreads on emerging market debt have
deteriorated by 76 basis points, which compares favourably to other segments like global high yield, where spreads
deteriorated more sharply, by 128 bps. As shown in graph 11, YTD yields are positive, outperforming debt denominated
in local currencies in relative terms. We continue to like emerging market debt denominated in hard currency.
11. EM HARD CURRENCY VS LOCAL CURRENCY
Source: Bloomberg and Banca March
104
103
102
101
100
99
98
97
31-dec. 7-jan. 14-jan. 21-jan. 28-jan. 4-feb. 11-feb. 18-feb. 25-feb. 3-mar.
China Global EM hard currency EM local currency
EQUITIES
Western markets came under pressure from the coronavirus. Against all odds, however, the
Chinese CSI 300 outperformed.
The coronavirus outbreak identified late last year in the Chinese city of Wuhan has taken its toll on western stock
markets. Fears that the virus could become a pandemic, coupled with uncertainty around the potential impact
on economic growth and corporate earnings, generated an abrupt – and occasionally excessive – reaction by the
main stock market indices.
In light of this uncertainty, the markets failed to respond to improved macro data and strong corporate earnings,
chalking up major losses since the Covid-19 outbreak (graph 12). The stock market performance in China, the
epicentre of the coronavirus, has been somewhat less dramatic, as the number of new infections and deaths has
begun to stabilise.
12. STOCK MARKET INDEX LOSSES SINCE 17 JAN
Source: Bloomberg and Banca March
0
-1,0
-3
-3,9
-6
-6,0
-8,0
(%)
-9
-9,0
-9,5
-12
-12,2
-15
-18
Nikkei MSCI Stoxx 600 Ibex 35 S&P 500 Nasdaq CSI 300
Emerging
CORONAVIRUS TO DELAY ECONOMIC RECOVERY 11HOUSE VIEW. MARCH 2020
Equities tend to bottom out when the rate of new infections stabilises. This time, market
pessimism was triggered by fears of the virus becoming a global pandemic.
When analysing the uncertainty generated by Covid-19, it is important to bear in mind previous health crises,
such as SARS (Severe Acute Respiratory Syndrome). The situation is not strictly comparable in terms of
location (in 2002-2003, it was concentrated in China) or in terms of the number of people infected (currently
approaching 95,000 vs 8,098 cases of SARS) and the economic impact will be different. However, there are
certain performance patterns that are useful and should help us gauge what lies ahead: markets tend to find a
bottom when the number of new infections begins to rise more slowly, the virus stabilises and the epidemic is
brought under control (graph 13).
Paradoxically, as Covid-19 has gradually been brought under control in China (the daily growth rate is now under
1%), global stock markets have posted steeper losses (graph 14). These market corrections were triggered by
fears that the epidemic could become a global pandemic and new Covid-19 infections in Europe and the US.
13. SARS: INFECTIONS VS EQUITY MARKETS 14. COVID-19: INFECTIONS VS EQUITY MARKETS
Source: Bloomberg and Banca March Source: Bloomberg and Banca March
104 0
118 0
102 500
20
114 100
40 1000
60 98
1500
110
80 96
2000
100
94
New cases
106
120 2500
New cases
92
140
102 3000
160 90
180 3500
98 88
200
4000
86
94 220
84 4500
240
90 260 82 5000
21-mar. 5-apr. 20-apr. 5-may. 20-may. 4-jun. 19-jun. 26-jan. 2-feb. 9-feb. 16-feb. 23-feb. 1-mar.
MCSI World AC Asia ex Japan New cases (7d average) (right)
Asia ex Japan MCSI World AC New cases (7d average) (right)
This situation has shifted the spotlight to outside China and means that whilst we will remain alert and expectant
over the next month (two full Covid-19 incubation periods) we also take the view that, given the drop in share
prices registered to date, we should not be waiting until the virus fully stabilises to start adding risk. The past
has taught us that when it comes to health crises, the market tends to bottom out when perceptions are at their
worst. On this occasion, the decisive quarantine measures adopted by the Chinese government have managed
to bring the virus largely under control; what remains to be seen in the rest of the world is how aggressive
quarantine measures will need to be, and to what degree they will be synchronised across different countries.
The uncertainty generated by the coronavirus affords a good opportunity to raise equity
exposure.
The coronavirus will, without a doubt, have a negative impact on the global economy and on corporate earnings.
However, at current levels, the market is failing to recognise the capacity for central banks and governments to
react decisively in the event of continued uncertainty and sustained virus containment measures. We believe the
rate cut by the Fed clearly evidences how determined central banks are to curb the economic impact and mitigate
the slowdown in growth.
The outbreak of Covid-19 has jolted the markets back to reality, with a violent correction from record highs for
the developed market indices and a sharp rise in volatility to extreme levels (graph 15).
CORONAVIRUS TO DELAY ECONOMIC RECOVERY 12HOUSE VIEW. MARCH 2020
15. VOLATILITY S&P 500 (VIX)
Source: Bloomberg and Banca March
85
75
65
55
45
35
25
15
5
06 07 08 09 10 11 12 13 14 15 16 17 18 19 20
Volatility Average
The incomplete data available calls for prudence, but we nonetheless believe this event will generate a temporary
slowdown and will not, in isolation, bring about the end of the economic cycle. The past has shown us that
significant downturns like this one have afforded investment opportunities, even if the economy and companies
do not start to recover until at least the third quarter of the year.
Whilst the maturity of the cycle continues to demand prudence and we maintain our neutral strategic position,
we do believe it is worth harnessing current prices to raise exposure, especially for investors whose portfolios
have lagged behind in recent months. We continue to believe that over a 12-month horizon, equities will offer
stronger returns than fixed income, and that the corrections of the last few days will significantly widen the
margin of safety for equities.
The market has failed to price in the strong corporate earnings season; results continue to
outperform expectations as the season approaches its end.
The Q4 corporate earnings season is now nearing its end and results have beaten expectations, especially in the
US. A total of 96% of the S&P500 companies have now posted results, outperforming expectations with EPS
growth of 3.1%, a positive surprise ratio of 70% and impressive sales growth of 5.8%, the highest rate in the last
five quarters. The energy sector posted the weakest results with a 40% drop in EPS; on the flipside, EPS growth
was strong for utilities (+17%) and technology (+9%) and the health sector posted robust revenue growth (+13%).
In Europe, earnings season has been delayed; the 63% of the Stoxx600 companies that have posted results to
date have also reported growth, but not as much as their US counterparts: EPS is up 1%, with a positive surprise
ratio of 56% and a 2% jump in sales. Mirroring the results in the US, the technology sector performed well (EPS
up 15%), as did financial names (also 15%). On the negative side, materials (-24%), energy (-22%) and consumer
discretionary (-11%) all underperformed.
CORONAVIRUS TO DELAY ECONOMIC RECOVERY 13HOUSE VIEW. MARCH 2020
By regions, we continue to like the UK and Asia.
We continue to like the UK market. We believe 16. FTSE SMALL CAPS VS EUROSTOXX 50
Source: Bloomberg (*) Since 30 October
the UK will strike a bare-bones agreement with
12
the European Union before the end of the year.
What’s more, the British economy – which was 8
beginning to show the early signs of recovery
4
before the coronavirus shock – will be buoyed
by the new government’s approval of a package 0
%
of fiscal measures, which is to be announced on -4
11 March and will provide a stimulus totalling at
-8
east 1% of GDP this year. We continue to prefer
to take positions in companies with exposure -12
2019 * 2020
to the domestic least 1% of GDP this year. We
FTSE Smallcaps Eurostoxx 50
continue to prefer to take least 1% of GDP this
year. We continue to prefer to take positions in companies with exposure to the domestic economy. As graph 15
shows, these companies should continue to outperform their larger counterparts (FTSE 100) which export more
and are therefore more susceptible to the appreciation of sterling, and also due to the significant exposure that
certain FTSE 100 companies have to commodities.
As for EM equities, we believe that factors such as their significant weight in the global economy (around 60%),
their contribution to global growth (around 80%), their considerable under-representation in the main global
indices and the substantial discount they offer versus developed market equities will all offset the impact of the
coronavirus.
In terms of sectors, the corrections in tech, European health and energy offer compelling
opportunities to buy.
We would highlight the strong relative performance registered since the beginning of the crisis by technology
(5.4%) and health (-7.1%), both of which we continue to actively recommend. By contrast, the steep drop in oil
prices in February (Brent crude fell 13% in February and 25% YTD), generated by expectations of plummeting
demand due to the coronavirus, gave rise to major losses in the energy sector (-20%). We are inclined to hold
positions in the sector, given its cyclical nature and the fact that it has suffered due to rotation into sectors with
a stronger SRI component. We believe prices have fallen excessively and that at some point, the market will price
in the sector’s compelling valuations, reasonable debt levels, strong cash generation at current – or even lower
– crude prices and attractive dividend yields.
CORONAVIRUS TO DELAY ECONOMIC RECOVERY 14HOUSE VIEW. MARCH 2020
CURRENCIES
The rate cut by the Fed caused the euro-dollar spread to tighten, highlighting the ECB’s
limited room for manoeuvre. Our target for the euro-dollar cross remains at 1.15.
17. EURO–DOLLAR IN FEBRUARY
Source: Bloomberg and Banca March
1.12 The dollar kicked off February up significantly against
1.11 Industrial production
the euro, climbing to just under 1.08 EUR/USD. This
Coronavirus
Dec Germany and France global appreciation was heavily influenced by the publication
1.1 of macroeconomic data pointing to weaker economic
GDP Q4-2019 activity in the eurozone. However, downside pressure
1.09 Germany
on the euro eased after the initial publication of PMIs
1.08 in the third week of February highlighted strong
Eurozone
PMI confidence data for Europe.
1.07
2-feb.-20 7-feb.-20 12-feb.-20 17-feb.-20 22-feb.-20 27-feb.-20 3-mar.-20
Following an initial appreciation of the dollar underpinned by risk aversion, the Fed’s rate cut and the publication
of macro data showing that US industry could also suffer due to potential China-related supply chain disruptions
saw the greenback fall, closing the month at over 1.10 EUR/USD.
The outlook for a UK rate cut now takes centre stage. Our target range for sterling remains
at 0.83 - 0.88 EUR/GBP.
The markets are pricing in a 25bps rate cut by the Bank of England to 0.50% at its next MPC meeting on 26
March. The BoE cut would come on the back of the Fed’s own rate cut and would seek to counteract the negative
impact of the coronavirus on the UK economy, as improving economic data – including record low unemployment
despite Brexit – and uncertainty around negotiations on the future relationship with the EU take a backseat to
Covid-19. In the month ahead, the presentation of the government’s budget and the expected announcement of
fiscal stimulus measures will also keep the pound trading within the target range of 0.83 – 0.88 EUR/GBP.
Banca March Market Strategy Team:
Joan Bonet Majó
Pedro Sastre
Luis Coello
Paulo Gonçalves, CAIA
Adrian Santos
CORONAVIRUS TO DELAY ECONOMIC RECOVERY 15HOUSE VIEW. MARCH 2020
EURIBOR EURIBOR 12 MONTHS (3 YEARS)
LAST 1 MONTH YTD 1 YEAR 0
1 MONTH -0,49 -0,45 -0,45 -0,37 -0.05
3 MONTHS -0,42 -0,39 -0,39 -0,31 -0.1
6 MONTHS -0,39 -0,34 -0,33 -0,23 -0.15
12 MONTHS -0,31 -0,28 -0,24 -0,11
-0.2
-0.25
CURRENCIES -0.3
-0.35
LAST 1 MONTH YTD 1 YEAR
-0.4
EUR/USD 1,1026 1,109 1,120 1,137
-0.45
EUR/GBP 0,860 0,840 0,854 0,854 mar.-17 jun.-17 sep.-17 dec.-17 mar.-18 jun.-18 sep.-18 dec.-18 mar.-19 jun.-19 sep.-19 dec.-19
EUR/CHF 1,065 1,069 1,086 1,139
EUR/JPY 119,0 120,2 122,0 126,2
EUR/USD (3 YEARS)
GOVERNMENT BONDS
1.3
LAST 1 MONTH YTD 1 YEAR
2 YEARS 0,91 1,31 1,57 2,51 1.25
5 YEARS 0,94 1,31 1,67 2,51
USA 1.2
10 YEARS 1,15 1,51 1,88 2,72
30 YEARS 1,68 2,00 2,33 3,08
1.15
2 YEARS -0,77 -0,67 -0,60 -0,52
5 YEARS -0,76 -0,64 -0,47 -0,28 1.1
GERMANY
10 YEARS -0,61 -0,43 -0,19 0,18
1.05
30 YEARS 0,15 0,07 0,35 0,81
2 YEARS -0,43 -0,43 -0,39 -0,26 1
5 YEARS -0,19 -0,23 -0,08 0,18 mar.-17 jun.-17 sep.-17 dec.-17 mar.-18 jun.-18 sep.-18 dec.-18 mar.-19 jun.-19 sep.-19 dec.-19
SPAIN
10 YEARS 0,28 0,24 0,47 1,17
30 YEARS 1,05 1,13 1,32 2,42
2 YEARS 0,31 0,50 0,59 0,83
10 YEAR GOVERNMENT YIELDS (SPAIN VS GERMANY)
5 YEARS 0,33 0,41 0,65 1,02
UK
10 YEARS 0,44 0,52 0,87 1,30
2
30 YEARS 0,94 1,04 1,38 1,82
1.5
CORPORATE BONDS (1 YEAR SPREAD) 1
LAST 1 MONTH YTD 1 YEAR
0.5
AA -0,27 -0,28 -0,27 -0,18
A -0,25 -0,26 -0,26 -0,13 0
BBB -0,15 -0,16 -0,16 0,03
-0.5
-1
COMMODITIES mar.-17 jun.-17 sep.-17 dec.-17 mar.-18 jun.-18 sep.-18 dec.-18 mar.-19 jun.-19 sep.-19 dec.-19
LAST 1 MONTH YTD 1 YEAR
BRENT 50,52 58,16 68,44 66,39
GOLD 1585,7 1589,2 1515,2 1319,9 IBEX (3 YEARS)
11000
EQUITY INDICES
10500
ÚLTIMO 1 MES YTD 3 AÑOS
10000
MSCI WORLD* 512,76 -8,21% -9,15% 18,38%
SP500 2954,22 -8,41% -8,29% 29,64% 9500
EUROSTOXX50 3329,49 -8,55% -11,18% 3,06% 9000
TOPIXX 1510,87 -10,30% -12,23% -0,71%
8500
IBEX35 8723,2 -6,88% -9,25% -6,36%
8000
FOOTSIE100 6580,61 -9,68% -13,27% -7,30%
MSCI BRAZIL 1898,68 -13,42% -20,00% 2,68% 7500
MSCI CHINA 82,37 1,33% -4,23% 31,41% 7000
MSCI EMERGING 1005,52 -5,35% -10,09% 10,59% mar.-17 jun.-17 sep.-17 dec.-17 mar.-18 jun.-18 sep.-18 dec.-18 mar.-19 jun.-19 sep.-19 dec.-19
* All countries Data: Bloomberg
CORONAVIRUS TO DELAY ECONOMIC RECOVERY 16HOUSE VIEW. MARCH 2020
150%
EQUITY INDICES
PERFORMANCE 140%
(3 YEARS)
Data: Bloomberg 130%
IBEX REL 120%
MSCI EMERGENTES REL
110%
SP500 REL
100%
90%
80%
70%
60%
apr.-17 jul.-17 oct.-17 jan.-18 apr.-18 jul.-18 oct.-18 jan.-19 apr.-19 jul.-19 oct.-19 jan.-20
IBEX rel MSCI Emergentes rel SP500 rel
*DATA AS OF 28 FEBRUARY 2020
RETURN DURATION PORTFOLIO DISTRIBUTION
MONTH YTD 1 YEAR CURRENT 1 MONTH AGO FIXED INCOME EQUITY ALT. INV.
MARCH RENDIMIENTO F.I. -0,04% -0,05% -0,39% 0,195 0,000 33,56% 0,00% 0,00%
MARCH RENTA FIJA CORTO PLAZO F.I. -0,11% -0,02% 0,45% 0,487 0,000 74,40% 0,00% 0,00%
MARCH PATRIMONIO C.P. F.I. -0,11% -0,03% 0,33% 0,689 0,000 73,44% 0,00% 0,00%
FONMARCH F.I. -0,34% 0,01% 1,37% 2,106 0,000 88,57% 0,00% 0,00%
MARCH EUROPA F.I. -9,88% -11,80% -14,48% 0,003 0,000 0,00% 97,74% 0,00%
MARCH INTL - VALORES IBERIAN EQUITY -6,04% -9,40% -3,73% 0,003 0,003 0,00% 97,93% 0,00%
MARCH GLOBAL F.I. -10,12% -13,23% 0,26% 0,003 0,000 0,00% 97,79% 0,00%
MARCH INTL - MARCH VINICATENA -8,32% -12,06% -9,67% 0,003 0,003 0,00% 95,83% 0,00%
MARCH INTL - THE FAMILY BUSINESSES FUND -7,83% -8,42% 1,29% 0,003 0,003 0,00% 94,88% 0,00%
MARCH INTL - MEDITERRANEAN FUND -7,63% -8,32% 0,00% 98,52% 0,00%
MARCH NEW EMERGING WORLD F.I.* -5,56% -9,02% -5,45% 0,000 0,003 0,00% 96,79% 0,00%
TORRENOVA DE INVERS. S.I.C.A.V. S.A. -1,90% -2,39% 0,25% 0,963 0,000 66,86% 16,79% 0,00%
CARTERA BELLVER S.I.C.A.V., S.A. -4,54% -5,69% -1,28% 1,071 0,000 43,18% 48,68% 0,00%
LLUC VALORES S.I.C.A.V., S.A. -7,73% -9,62% -2,67% 0,003 0,000 0,00% 85,45% 0,00%
MARCH INTL - TORRENOVA LUX -1,90% -2,40% -0,35% 0,003 0,003 72,08% 16,33% 0,00%
MARCH INTL BELLVER LUX -4,41% -5,57% -4,53% 31,05% 46,35% 0,00%
MARCH INTL LLUX LUX -7,25% -9,22% -6,35% 10,50% 79,29% 0,00%
MARCH PATRIMONIO DEFENSIVO F.I.* -0,62% -0,51% -0,18% 0,000 0,003 57,42% 2,59% 32,03%
MARCH CARTERA CONSERVADORA F.I.* -1,89% -1,96% 0,15% 0,000 0,003 44,28% 19,24% 30,30%
MARCH CARTERA MODERADA F.I.* -3,50% -3,75% 0,35% 0,000 0,003 24,45% 42,80% 28,65%
MARCH CARTERA DECIDIDA F.I.* -5,75% -6,65% -1,07% 0,000 0,003 1,67% 74,34% 22,00%
PLAN PENSIÓN CRECIENTE, F.P. -0,27% -0,12% 0,57% 1,446 0,000 87,31% 0,00% 0,00%
MARCH PENSIONES 80/20, F.P. -2,68% -3,14% 1,69% 2,154 0,000 68,05% 22,98% 0,00%
MARCH PENSIONES 50/50, F.P. -4,64% -5,78% 2,15% 1,852 0,000 44,83% 43,79% 0,00%
MARCH ACCIONES, F.P. -8,58% -10,76% 3,69% 0,003 0,000 0,00% 88,05% 0,00%
MARCH AHORRO, F.P. -3,41% -4,12% 2,41% 2,167 0,000 62,23% 32,34% 0,00%
PLAN ÓPTIMO, F.P. -3,16% -3,91% 2,19% 2,091 0,000 58,93% 29,61% 0,00%
MARCH MODERADO EPSV -2,36% -2,93% 1,25% 1,491 0,000 54,56% 20,87% 0,00%
MARCH ACCIONES EPSV -7,75% -9,93% 4,23% 0,008 0,000 0,00% 80,73% 0,00%
CORONAVIRUS TO DELAY ECONOMIC RECOVERY 17HOUSE VIEW. MARCH 2020 IMPORTANT REMARK: The contents of this document are merely illustrative and do not pretend, are not and cannot be considered under any circumstances as an investment recommendation towards the contracting of financial products. This document has only been prepared to help the customer make an independent and individual decision but does not intend to replace any type of advice needed for the contracting of such products. The terms and conditions described in this document are to be viewed as preliminary terms only, subject to discussion and negotiation as well as to the agreement and final drafting of the terms affecting the transaction, which will appear in the contract or certificate to be issued. Consequently, Banca March, S.A.. and its customers are not bound by this document unless both parties decide to embark on a specific transaction and agree on the terms and conditions concerning the final documents to be approved. Banca March, S.A.. does not offer any guarantee, expressly or implicitly, in relation with the information shown in this document. All terms, conditions and prices contained in this document are merely informative and subject to modifications depending on the market circumstances, changes in laws, jurisprudence, administrative procedures or any other issue which may affect them. The customer should be aware that the products mentioned in this document may not be appropriate for his/her specific investment targets, financial situation or risk profile. For this reason the customer must make his/her own decisions by taking into account such circumstances and by obtaining specialised advice in tax, legal, financial, regulatory, accounting issues or any other type of information required. Banca March, S.A.. does not assume any responsibility for any direct or indirect costs or loss which may result from the use of this document or its contents. No part of this document can be copied, photocopied or duplicated in any way or through any means, redistributed or quoted without a previous written authorisation by Banca March, S.A. CORONAVIRUS TO DELAY ECONOMIC RECOVERY 18
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