When entering the site and if cookies are prevented from being saved, a message must be displayed
in a popup message box informing the user that their local browser settings are preventing
cookies from being saved and that cookies are required for the site to work. Exact text
to be provided for UAT. On OK click of the message, the user should be redirected to
the global landing page (currently ssga.com).
As many of you will have seen, the Saudi/Russia disagreement about how to react to falling global demand post-Covid-19 has led to a sharp fall of 25–30% in oil prices, bringing the YTD fall to over 50%. A re-run of the high yield energy distress looks very likely in the short term, in addition to stresses in other markets. Further, markets are trying to digest the less negative story emerging from China alongside the worsening of Europe. As steps are taken to delay Covid-19, analysts will struggle to keep up with the real-time earnings story in all but the most obvious cases such as airlines.
In the next few weeks, we are likely to experience many repetitions of the same basic weakening global economy story; we will see it through estimate revisions, PMIs and, with a little delay, the hard economic data. Some analysts will focus more on the new cases or deaths from Covid-19 – not an especially useful indicator except as a guide to further restrictions by government. Our quantitative modelling team has evaluated the risks of being whipsawed during periods where prices lead estimate revisions but changing our value weighting too much runs the risk of avoiding opportunity as new trends emerge. As I write this note, sovereign yields are trading at extremes and are not helpful to value, unless or until a huge stimulus boosts nominal growth.
It is tempting to suggest that markets have parted company from fundamentals, and this must surely be true of bond yields. The same cannot be said of the equity markets. In our Dividend Discount Models, the risk premium is being sharply revised up at the same time the earnings growth estimate is being sharply revised down. Falling risk-free rates of even 100 basis points are not enough to offset the rising risk premium.
The key question in my view is not what the world looks like in March through June — likely to be pretty awful — but what the world looks like in September. We expect many governments to restart economies with a coordinated fiscal stimulus after the peak of the epidemic has passed and quarantines have been lifted.
Markets will be looking forward to calendar 2021 and 2022 earnings, and it is a racing certainty that the tone amongst central banks will remain super-dovish. Could there be inflationary pressures during the Covid-19 outbreak? In an environment with sharp changes in demand this is likely to be a feature, but perhaps not widespread enough to move core away from deflationary bias.
Another key question is how quickly we see some currencies re-set towards fair value — a common feature of currencies we have found through our research in our extensive Dynamic Strategic Hedging strategy. We have already seen this in the yen which has rallied almost 8% in the last few weeks. Overnight we saw a flash crash in AUD/NZD with recovery afterwards, providing clear evidence of the risks inherent in heightened risk sensitivity at banks, and their use of electronic market-making.
The trading desks are providing regular feedback on trading liquidity, which now looks variable but not dire. We traded Asia Pacific emerging market bonds this morning and all markets have traded acceptably. All credit markets are trading wider and especially risk-sensitive UK financials, Italy and airlines. ETFs continue to trade well in secondary markets with further evidence that they are an important independent source of liquidity to markets.
We will of course keep you well informed of developments.
The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor. All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information. The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without State Street Global Advisors’ express written consent.
The views expressed in this material are the views of Rick Lacaille through 9 March 2020 and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA’s express written consent.
All information is from SSGA unless otherwise noted and has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
The information provided does not constitute investment advice as such term is defined under the Markets in Financial Instruments Directive (2014/65/EU) and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell any investment. It does not take into account any investor’s or potential investor’s particular investment objectives, strategies, tax status, risk appetite or investment horizon. If you require investment advice you should consult your tax and financial or other professional advisor.
Investing in foreign domiciled securities may involve risk of capital loss from unfavourable fluctuation in currency values, withholding taxes, from differences in generally accepted accounting principles or from economic or political instability in other nations.
Past performance is not a guarantee of future results.
Equity securities may fluctuate in value in response to the activities of individual companies and general market and economic conditions.
The trademarks and service marks referenced herein are the property of their respective owners. Third party data providers make no warranties or representations of any kind relating to the accuracy, completeness or timeliness of the data and have no liability for damages of any kind relating to the use of such data.
This information is for informational purposes only, not to be construed as investment advice or a recommendation or offer to buy or sell any security. Investors should always obtain and read an up-to-date investment services description or prospectus before deciding whether to appoint an investment manager or to invest in a fund. Any views expressed herein are those of the author(s), are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may make different investment decisions for different clients. There are no guarantees regarding the achievement of investment objectives, target returns, portfolio construction, allocations or measurements such as alpha, tracking error, stock weightings and other information ratios. The views and strategies described may not be suitable for all investors. SSGA does not provide tax or legal advice. Prospective investors should consult with a tax or legal advisor before making any investment decision. Investing entails risks and there can be no assurance that SSGA will achieve profits or avoid incurring losses.
Performance quoted represents past performance, which is no guarantee of future results. Investment return and principal value will fluctuate, so you may have a gain or loss when shares are sold. Current performance may be higher or lower than that quoted.
Images of NYSE Group, Inc. are used with permission of NYSE Group, Inc. Neither NYSE Group, Inc. nor its affiliated companies sponsor, approve of or endorse the contents of this program. Neither NYSE Group, Inc. nor its affiliated companies recommend or make any representation as to possible benefits from any securities or investments.