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In September and October, rising Covid-19 infections and uncertainty ahead of the US elections depressed sentiment in the markets for risky assets. This also led to declines in the equity markets. However, November brought a turnaround. The outcome of the US elections and the positive results regarding a vaccine led to a price fireworks at the beginning of November. The friendly mood on the markets also had a positive effect on the YOU INVEST funds.

Corona virus: hope for vaccine

The coronavirus has not disappeared. A relaxation of the containment measures is followed by an increase in the number of infections. As soon as there is a threat of the health system being overburdened, "breakwaters" are set. The consequence: the recovery of economic activity is followed by a decline. The recovery path thus remains rough, but an effective and safe vaccine would break the link between mobility and virus case numbers.

The economic support measures of monetary and fiscal policy have mitigated the consequences of the lockdown measures. Additional fiscal packages are needed to ensure that the lockdown does not turn into a knockdown, i.e. that a liquidity crisis does not turn into a solvency crisis. In our "recovery" basic scenario, we see equities, corporate bonds in the high-yield segment and emerging market bonds as attractive asset classes.

Warning notices in accordance with the Austrian Investment Fund Act:

The funds of the YOU INVEST range may invest significant parts of their assets under management in the shares of investment funds (UCITs, UCIs) as laid down in sect. 71 of the Austrian Investment Fund Act of 2011.

Since this is a blog, we do not update the data and facts of the respective entries. They are in line with our knowledge at the time of going to press. For the current data and facts in connection with funds, please refer to the information in the section “Reporting”.

The general investment environment continues to be driven by several positive factors. First and foremost: the supportive policies of central banks, which continue to exist and are trying to avert the negative economic consequences of the pandemic. The US Federal Reserve announced in September that it would not raise interest rates at least until 2023 and would in the meantime even tolerate slightly higher inflation than 2%. The next fiscal packages will be put together if necessary.

The economic situation seems to be improving. The rising virus numbers do not seem to unsettle the markets. The focus is already on the recovery phase following the use of a vaccine, the discovery of which seems only a matter of time.

More mortgage bonds in the YOU INVEST funds

Against this background, a period of consolidation has generally taken place in the markets. The downward trend in yields has been halted for the time being.  We have slightly reduced the share of US government bonds in the YOU INVEST funds (mainly for YOU INVEST Active EUR, because the other funds already have a reduced share of US government bonds). They have benefited strongly from falling yields in recent months. The share of the US bond market remains high, but interest rate sensitivity has been reduced. The proceeds from sales were invested in mortgage bonds with significantly shorter maturities.

Disclaimer:

Forecasts are no reliable indicator for future developments.

Since this is a blog, we do not update the data and facts of the respective entries. They are in line with our knowledge at the time of going to press. For the current data and facts in connection with funds, please refer to the information in the section “Reporting”.

On top of the corona situation, two additional developments have been crucial for the development of the financial markets. The central banks have been pursuing a very expansive regime on a global scale, and at the same massive stimulus packages have been passed in an effort to get the economy up to speed again.

From a global perspective, the economic and monetary policies are ultra-expansive. With the interest rate policy having lost its effectiveness, central bank liquidity is now of crucial importance. The central banks are massively widening their balance sheet totals in support of the markets.

Company earnings with positive surprises

The expansive monetary policy, the low interest rates, and the surprisingly good company results have been the driving factors for the equity markets in Q2 2020. In the USA, more than half of the companies have reported their results, with 85% exceeding analyst estimates and only 13% falling short. In Europe, about a third of companies have reported their results so far, with earnings 18% below last year’s. While the sector composition in the USA and Europe differs, the pattern is similar: oil & gas (with stronger weightings in Europe) is the weakest sector this year, whereas technology (the biggest heavyweight in the USA), consumer goods, and the healthcare industry are among the strongest sectors.

In an environment of stable or even growing profits, as some technology companies have shown, the fund managers of Erste Asset Management continue to favour equities or high-yield corporate bonds as well as government bonds of the emerging markets. As security-oriented asset classes, we still hold US government and mortgage bonds.

With regard to emerging markets: in August we slightly expanded emerging market bonds, but in hard currency. Local currencies, on the other hand, have a slightly lower weighting: The relatively weak US dollar generally helps countries with foreign currency debt, but at the same time the more dollar-oriented currencies of Latin and South America tend to weaken.

Overall, the environment for the markets should remain constructive.

The term “Coronacession” has been created as a chimaera of corona and recession. The central question is how deep the emergency runs. As dramatic as the containment measures against the virus are, as comprehensive is the support aimed at avoiding a depression (i.e. a persistent, severe recession). 

In order to be able to make any predictions, it is worth drawing up different scenarios.

• Scenario 1: after the slump in the first half, the economy recovers in the second half of the year. The measures taken to contain the virus are being reduced, and the ones taken to limit second-round effects have been successful. The economy follows a V-shaped growth pattern. In this case, equities are the optimal form of investment.
• Scenario 2: the economy is recovering slowly, because the effectiveness of the economic policies is limited.  The sentiment remains subdued and dampens investments, consumption, and the labour market. The recovery will only take hold in 2021. This is a U scenario, because the slump is not a gorge but a valley. This scenario suggests a mixed (i.e. broadly diversified) portfolio.
• Scenario 3: no recovery in the foreseeable future. The measures taken in an effort to contain the virus may take longer than expected, and the support may not be sufficiently effective. This is an L scenario, where the investment product of choice are investment grade investments (i.e. government bonds).

Disclaimer:

Forecasts are no reliable indicator for future developments.

Since this is a blog, we do not update the data and facts of the respective entries. They are in line with our knowledge at the time of going to press. For the current data and facts in connection with funds, please refer to the information in the section “Reporting”.

Stock exchanges are usually seen as leading indicators of economic developments, and they are currently close to their all-time highs, or have indeed passed them. By contrast, the prices of credit-safe bonds have fallen from their all-time high at the beginning of September.

The reason for the current rally at the end of the year: The global economy has become more likely to go through a period of mild recovery in 2020. Some economic indicators suggest that the global economy is not running as flawlessly as it used to do, but we are far from a recession. Private consumption and the low unemployment are supporting the global economy. Inflation remains low and “under control”. The international central banks loosened their monetary and interest rate policy in order to prevent the economy from weakening.

The stock exchanges reflect the optimism about the future course of the economy. Optimism outweighs uncertainty, and that is good for the capital markets. The perceived likelihood of an agreement in the trade conflict between the USA and China continues to make a case for equities as attractive investments in 2020. Erste Asset Management sees the return potential (dividend included) bandwidth of 6-8%. In the equity segment, the Erste Asset Management fund managers regard Asian equities as particularly promising, while also expecting good performances from the stock exchanges in the USA, Europe, Japan, and the CEE emerging markets. As far as sectors are concerned, the focus is on raw materials, industrials, consumer goods, and financials.

The fact that the equity bull market has been going on for over a decade now, has brought investors above-average profits over the years. The alternatives to equities are rare, with the exception of high yield corporate bonds in the euro zone and the USA, as well as emerging market bonds.

Disclaimer:

Forecasts are not reliable indicators for future developments.