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Portfolio perspectives | Video - 3:53 MIN

MAQS asset allocation video - Coronavirus dislocated financial markets

April 2020

Opportunities in the crisis

Monitoring the virus & its implications

  • Tracking the virus: Europe feels the full hit of the virus, but there are tentative signs of decelerating growth rates, especially in Italy. The US is now in the eye of the storm as new cases soar. In China and South Korea new cases remain low.
  • Economic disruption and resumption: Latest data are showing the huge damage of the virus in the Western world. PMIs plummeted in Europe and the US. In the latter, initial jobless claims hit record highs. In China, economic activity is gradually resuming, with industrial production leading consumer activity.
  • Policy responses: Huge monetary and fiscal packages in place in Europe and the US. The Fed announced ‘unlimited’ QE and the ECB announced a further EUR750bn QE programme. On the fiscal front, the US approved a USD2tn package and large programmes are also in place in Europe, but jointly-guaranteed debt remain elusive. China has so far committed USD344bn in measures.
  • Sentiment and systemic market stresses: Sentiment measures showing early signs of consolidation. Indicators of systemic stress rose, but did not unhinge. Market volatility metrics starting to ease following colossal policy measures.

Key views & asset allocation

  • Fundamental views: Ultimately we expect a U-shaped recovery that will likely require ‘learning to live with the virus’ via innovations in testing and gradual economic resumption. The main downside risk is prolonged and intermittent shutdowns that prolong a global recession. Near term, the coronavirus is hitting the US with full force so Fed and fiscal efforts do not necessarily mark the bottom in stocks.
  • Strategy: Valuations in US equities haven’t adjusted as much as for other risky assets such as UK equities and commodities. We have more conviction on the latter two, also noting that commodity assets usually outperform after recessions are priced and should be supported in reflationary scenarios.
  • Asset allocation changes: We cut our US equity conviction to neutral and replaced this with UK equites, global commodities and long AUD/USD. We also remain overweight EMU and EM equities. On rates, based on fundamental and market dynamics, we see higher yields, and remain underweight in EMU bonds.

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Please note that articles may contain technical language. For this reason, they may not be suitable for readers without professional investment experience. Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice. The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns. Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions). Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

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