global perspectives
Pull and push: pandemic damage vs central bank policy
A pull and push is emerging between ongoing damage from the pandemic, and extraordinary central bank intervention.
As infection rates have stabilised in much of the developed world, we are seeing incremental easing of the near-universal lockdown restrictions imposed nearly two months ago. Germany - which was widely credited with managing the crisis better than most developed countries - has worryingly seen an increase in the infection rate as restrictions have been eased.
Elsewhere, there are reports of new clusters in Korea and Wuhan, China, as well as a surge in infection rates in major emerging markets such as Russia and Brazil. Social distancing is clearly here to stay for the foreseeable future, and until a credible vaccine is developed and deployed globally.
Eurozone politics and US-China tension
Alongside the economic and social difficulties created by the ongoing health care crisis, political issues in Europe have returned to the fore.
A German constitutional court ruling questioned the mandate of the European Central Bank (ECB) in implementing the 2015 asset purchase programme. This jurisdiction tussle between the German Federal constitutional court and the European Court of Justice (ECJ) could not have come at a worse time. The tussle reintroduces pressure on the central bank just as wider EU politics complicate measures aiming to manage the economic damage and boost economic recovery, especially in hard-hit peripheral countries such as Italy and Spain.
In addition to political strains in Europe, rhetoric between the US and China has heated up, raising the spectre of renewed trade war tensions.
We continue to believe the ECB will need to activate the Outright Monetary Transactions (OMT) programme in order to keep peripheral sovereign spreads in check. Still, a phase of market pressure may be inevitable before such a policy response can be implemented.
In addition to political strains in Europe, rhetoric between the US and China has heated up, raising the spectre of renewed trade war tensions. The US presidential elections and handling of the pandemic by the Trump administration are important factors, as the pandemic morphs into a geopolitical risk.
We believe this geopolitical noise will remain very loud, though US reliance on China in the supply chain (especially in medical supplies) reduces the immediate risk.
Exceptional monetary accommodation
We expect central bank actions to prove important in supporting the credit markets from pandemic shocks turning into refinancing risk.
The Federal Reserve is now acting as a de-facto backstop for corporate credit markets, buying extraordinary amounts across debt markets, and even delving into fallen angels for its asset purchases. Such moves are truly exceptional. We believe the ECB is also likely to buy fallen angels eventually, after it upped the ante on monetary accommodation with specific pandemic measures to boost lending and purchase debt.
We expect such central bank actions to prove important in supporting the credit markets from pandemic shocks turning into refinancing risk. In the meantime, however, uncertainty about the virus and political tensions from the Eurozone to the US and China loom in the near future.
Investment implications
All in all, we continue to recommend central bank stopped assets, and in particular global corporate credit. Structural themes such as FinTech (financial technology) and Asia fixed income are likely to benefit from trends taking shape in the post-pandemic world, in our opinion. Despite sharp falls in company earnings, global equity markets have recaptured a significant chunk of the losses incurred since early March.
Going forward, we expect a ‘pull and push’ between ongoing pandemic damage to the economy, and the deep and profound policy support unleashed by fiscal and monetary authorities.
Read our CIO views
Policymakers have delivered extraordinary monetary accommodation globally. Our CIOs sift through what central bank intervention means for investors, examining the opportunities created across asset classes.
