Market Insights – April 6, 2020

Each week, a team of experts shares its market views with you.

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Essentials

Oil prices rose sharply on news suggesting that output would be scaled back considerably. But a production cut would do nothing more than slow the increase in inventories. We think prices will remain very volatile, and won’t rise above around USD 35 per barrel – which is the average cost of extracting shale gas.

Although the pandemic has been brought under control in China, the impressive March rebound in business confidence (particularly the manufacturing PMI) should be short-lived. At 52, the PMI was back in expansion territory, up from the record low of 35.7 recorded in February. But exports are expected to remain weak despite recent stimulus measures – such as the reserve requirement cut.


US job market data continue to deteriorate. Another six million workers filed for unemployment benefits last week, after 700,000 jobs were lost in March. Some of these workers will quickly get back to work once the crisis is over, but unemployment is still likely to remain high.

 

The global economy is at a standstill but there is hope on the public health front

Once the virus reached Europe, it took just a couple of weeks for the public health crisis to turn into an economic one. The global economy has come to a near standstill as a result of the drastic confinement measures put in place in most countries to prevent health systems from becoming overwhelmed. This unprecedented situation has had major financial consequences and required a rapid, powerful response from the authorities. The massive fiscal stimulus enacted in Europe, the USA and elsewhere, together with the interventions by the European Central Bank (ECB) and the US Federal Reserve (Fed), should prevent the exogenous shock caused by the pandemic from triggering a long-lasting economic crisis, and even a financial one. We’re starting to see the results of the central banks’ decisive action, especially on the bond markets, which had come under pressure. And the public health measures put in place by the authorities are also starting to have an impact. The pandemic should soon reach its peak in Europe. The number of new cases is dropping in most European countries, led by Italy, which has been hit the hardest by COVID-19. This is a reassuring development and could mean that the USA – the world’s largest economy – will see a drop in new cases later in the month. Although the global economy is now at a standstill, the most likely scenario is still that it will gradually pick up.  Barring a second wave of infections further into the year, the scope of the stimulus measures brought in by developed countries could pave the way for quite a strong recovery in late 2020 and in 2021. These positive developments lead us to believe that the worst of the stock-market correction is over, even if we’re likely to see some volatility in the short term. We have therefore rebalanced our portfolios and brought equity exposure back up to our tactical allocation levels. If the pandemic does indeed start to recede across the world and our economic forecasts prove accurate, we may even increase our exposure to assets that took the hardest hit and are therefore the most attractively valued. This includes equities, as well as lower-quality bonds.

The Swiss market is being buoyed by pharmaceuticals

The Swiss economy could very well fall into a recession in 2020, but domestic stock-market indexes are holding up well.

It’s true that Swiss GDP growth forecasts for 2020 are nothing to cheer about – the KOF Swiss Economic Institute expects the economy to shrink by between 1% and 4%, depending on how the pandemic plays out. But these figures are much better than the forecasts for other regions. Although the Swiss economy is very much export-oriented and therefore dependent on the global economy, it is still extremely resilient, and even more so since the 2008 financial crisis.  Over the years, the pharma sector, which is relatively immune to economic crises, has accounted for an increasingly large proportion of the country’s exports.

While luxury goods firms will be hit hard by the recession, other companies should be able to weather the storm without too much damage. This could be the case for companies in the construction, medtech and IT sectors, which, once the pandemic has reached its peak, will be able to recover most of the earnings lost during the lockdown.

In the recent past, the high prices of Swiss stocks have led us to be cautious about this market. But valuations have mostly returned to normal relative to global indexes. Once we have more visibility about the pandemic in Europe and the impact of the measures to stem its spread, we will be able to consider increasing our exposure to the Swiss market.

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