JPMorgan, Amundi, HSBC, LGIM and Invesco on the outlook for equities, bonds and alts
Chris Flood and Peter Smith
The escalating coronavirus pandemic is a health emergency threatening to torpedo the global economy into a deep recession.
It has already sparked the biggest sell-off across global markets since the 2008 financial crisis.
FTfm asked investment chiefs at some of the world’s leading asset management companies for their views on where to go from here.
One clear message for investors is that strong risk management will be needed as they confront a wave of big earnings downgrades and further weakness in bond yields.
Pascal Blanqué
Chief Investment Officer at Amundi
© Magali Delporte/ Picturetank
Equities. What is your forecast range for the S&P 500 at the end of 2020? The fall of equities has been meaningful, but current levels do not yet discount a prolonged global recession. This bear market is unusual and might not be long lasting given the speed and size of policy responses, but it will also depend on the spread of the virus outbreak. We focus on quality stocks with low leverage and healthy balance sheets in Europe. Bonds. Will the US 10-year Treasury yield go negative? There is a paradigm shift. Central banks’ balance sheets and public debts will soar in tandem. Debts will be de facto monetised. Low interest rates and financial repression are on the cards. Bear in mind that with quantitative easing, the bulk of government bonds will soon be held by central banks. Alternatives. Will the search for yield intensify in the years ahead? Demand for private assets will remain strong. It is not their absolute performance that makes them attractive, it is their performance relative to listed comparables. This premium is linked to their low liquidity but also to the alpha that is inherent to these asset classes (“active ownership” creates value). Historically, this has been true throughout crises. On allocations, private market valuations will progressively adjust to the new environment. This will definitely provide good investment opportunities. That said, we have always advised our clients to invest stable amounts every year in these asset classes whatever the market conditions, in order to reduce their exposure to market cycles. Helicopter money. Should governments start sending cash to citizens? The cheques that will be sent to US households are already a form of helicopter money. We’re witnessing a merger of central banks and state balance sheets. The risk is to open a Pandora's box of claims of all kinds once the crisis is over, with a risk of inflation. Joanna Munro Global Chief investment officer at HSBC Global Asset Management
© Dave Vickers
Equities. What is your forecast range for the S&P 500 at the end of 2020?
While the average S&P 500 bear market is a drop of about 40 per cent, with a peak-to-trough phase of 18 to 24 months, the unique aspect of this sell-off is its speed.
This is the fastest bear market on record.
And historically recoveries to new highs take twice as long as the initial declines.
That means we could envisage an equity market recovery over the next six months but risks abound.
In terms of long-run returns, these have moved up rather than down, due to the lower starting point.
Bonds. Will the US 10-year Treasury yield go negative?
Policymakers have responded quickly to the virus.
We anticipate that the recently announced programmes will be in place for months.
This response is also meant to support substantial government bond issuance as well as easing corporate refinancing.
With debt cost playing a key role in the sustainability of higher debt/GDP ratios over the medium term, investors should expect low yields for a long period of time.
Fiscal policy will play a key role in rebuilding market sentiment, dented by market illiquidity and by the perspective of elevated default rates.
Recession-fighting is not just about monetary policy on steroids but also about targeted measures for distressed sectors and policy co-ordination.
Alternatives. Will the search for yield intensify in the years ahead?
Alternative strategies have fulfilled their role as smart-diversifiers during the crisis.
Hedge fund returns have been superior to equity markets in aggregate.
Private equity has benefited from its longer-term funding model and lower interest rates, and cheap assets should spur activity.
Pockets of stress remain, however alternative risk premiums have improved dramatically over a short period of time.
With significant discrepancy of returns across segments and managers, the immediate lessons learnt are that diversifying sectors is key along with careful selection of managers and funds.
Hedges. How can investors build more robust hedges or protection?
There are questions about whether core government bonds can continue to play a useful hedge role, especially as policy pivots toward co-ordinated fiscal and monetary action.
We advocate smart diversification, focusing on some parts of the fixed income universe, emerging market assets, equity factors and alternatives.
Helicopter money. Should governments start sending cash to citizens?
The global virus containment policies have resulted in an economic “sudden stop” — a short-term, double digit decline in year-on-year output.
Governments will be focused on boosting aggregate demand again. Helicopter money is an option, which has already been used in Asia.
We may need governments to step in even more as buyers of last resort, to support household and business cash flows.
Kristina Hooperchief global market strategist at Invesco
© Bloomberg
Equities. What is your forecast range for the S&P 500 at the end of 2020?
We are living in a world of extreme uncertainty, where outcomes will be dictated by policy responses in three key areas: health, monetary and fiscal.
A number of indicators are suggesting that we are near bottoming.
Given the unprecedented circumstances, the best we can do is construct a broad range of scenarios.
Our 12-month targets for the S&P 500 range from 1,400 to 3,000. UK and Japanese equities offer upside potential.
Select Chinese equities may also benefit given that economic activity is improving, albeit slowly.
Bonds. Will the US 10-year Treasury yield go negative?
The Fed’s programme will have a positive impact.
However, the Fed’s support will not be able to prevent genuinely distressed credits and companies from going bankrupt.
We still favour looking higher in the quality spectrum for some of the best potential rewards at this point in the cycle.
Alternatives. Will the search for yield intensify in the years ahead?
Yield will be even more scarce given current central bank actions, and so the hunt for yield will further intensify.
Investors will need to diversify their income-producing portfolios to include a broader mix of yield-producing asset classes beyond traditional fixed income.
That should include dividend-paying stocks, infrastructure and real estate investment trusts.
Hedges. How can investors build more robust hedges or protection?
The coronavirus pandemic is likely to be a short-term phenomenon, while investors should be building portfolios for the long term.
Diversification remains the most effective hedge.
Exposure to gold, government bonds and cash have historically offered varying degrees of diversification because of their lower correlations to risk assets.
Gold has lost some of its froth, making it more attractively valued.
Despite higher debt levels, US Treasuries are likely to continue to act as portfolio stabilisers.
Helicopter money. Should governments start sending cash to citizens?
The drop in economic activity requires a big amount of fiscal stimulus to keep businesses and households solvent.
Central banks should consider the use of helicopter money, particularly in a situation where the fiscal stimulus is insufficient.
Recall that in the global financial crisis, fiscal stimulus was inadequate and monetary policy tools were blunt instruments that had a greater impact on capital markets than on the general economy.
We can’t afford to have that happen this time around.
There are legitimate criticisms of helicopter money, including that it expands central bank powers, overstepping into territory reserved for the legislative and executive branch with little accountability.
While I would not advocate for helicopter money in normal circumstances, we need to use every tool to ensure this is a ‘V’ shaped recovery — and helicopter money could be an effective tool.
John Bilton
head of global multi-asset strategy at JPMorgan Asset Management
Equities. What is your forecast range for the S&P 500 at the end of 2020?
In a recession earnings can decline 25-30 per cent and in the 2008 crisis they fell more than 50 per cent.
It is too soon to place an exact earnings degradation number on the S&P 500 yet, but given the sharp moves in PMIs and jobless claims we should be prepared for a recession level of earnings downgrades.
We expect the hit in 2020 to be mirrored by sharp rises in 2021.
For long-term return expectations, these are expected to increase as the entry point is at cheaper valuations and lower index levels.
Nevertheless, it is too soon to be adding meaningful risk in stocks.
Bear market rallies and short squeezes notwithstanding, the forthcoming earnings season will have some “sticker shock” to it, which may weigh on sentiment in stock markets.
Bonds. Will the US 10-year Treasury yield go negative?
Bond yields are expected to fall, but absenting Fed Funds going negative, then it is unlikely the US 10-year note yields will go negative.
The Fed’s purchase of investment grade credit will allow investors to move towards selected corporate credit with confidence.
However, it does not alleviate the risk of downgrades for firms and sectors with challenged cash flows.
Equally, it doesn’t directly support high yield, where in addition to the broader economic slowdown, the slump in oil prices will affect this part of the credit market.
Alternatives. Will the search for yield intensify in the years ahead?
Private equity funds have a significant cash balance, which ought to provide a cushion as well as serve as dry powder for dislocated or stressed sectors.
While the illiquidity is a consideration, many investors will view such assets as a long-term holding, rather than a ready source of liquidity.
Some parts of alternatives, such as infrastructure, are offering a stable source of income, which could prove quite resilient through a period of market weakness.
Hedges. How can investors build more robust hedges or protection?
Despite low yields and negative cash rates, a defensive portfolio will include an allocation to bonds and cash.
Owning these assets will not provide much of a return but should offer some portfolio resilience.
Over the intermediate term, we expect the dual deployment of fiscal and monetary stimulus to mean steeper yield curves.
However, this is an issue that will be priced only after the immediate economic contraction starts to pass.
Helicopter money. Should governments start sending cash to citizens?
The precise nature of fiscal support to economies, firms and citizens will vary from one country to the other.
Whether one style of fiscal support is better than another, only time will tell.
Governments are, quite rightly, responding to a humanitarian and social crisis with a wide range of tools.
Investors were also calling for fiscal support to stabilise economies and damp the shock.
As with the tools deployed following the 2008 crisis, it is likely it will take many years to understand the full range of effects of the fiscal tools being used.
Sonja Laud
Chief Investment Officer at Legal and General Investment Management
© Bloomberg
Equities. What is your forecast range for the S&P 500 at the end of 2020?
Our view is based on whether there is a second wave of infections within countries that successfully controlled the first wave.
If not, then we can assess the near-term economic and earnings impact and have some visibility on equity market valuations.
But if we do see a second wave, then the economic impact is likely to be more drawn out, threatening a deeper contraction and a more serious equity market impact.
Bonds. Will the US 10-year Treasury yield go negative?
While you can’t rule it out, negative Treasury yields would be surprising while the Fed is reluctant to cut base rates below zero.
However, they appear to have a huge capacity to buy government debt and keep a lid on interest rates.
The Fed’s decision to buy corporate bonds is very important for that market and provides investors with reliable support, although this can’t avoid credit quality deterioration as the economy contracts.
Alternatives. Will the search for yield intensify in the years ahead?
Alternatives such as infrastructure, real estate, farmland, timberland and forestry provide the opportunity to invest in real assets that should survive the pandemic.
These assets are less correlated to equity markets.
However, they have also suffered during the recent equity market sell-off, so we see them as a potential “defensive” recovery story, especially since they tend to perform well when interest rates are low.
Hedges. How can investors build more robust hedges or protection?
Traditional correlations between bonds and equities broke down at times in March and portfolio hedges didn’t always work.
What the current crisis demonstrates is that strong risk management is crucial to navigating choppy waters. In addition, diversification should prove a profitable strategy in the market recovery.
Helicopter money. Should governments start sending cash to citizens?
Governments and central banks need to find ways of reallocating cash — speedily — to those most in need.
For a period, we see no moral hazard in paying people without expecting work in return, to ensure they can continue to consume.
With regard to government bonds, we are concerned that the sheer scale of the fiscal response could ultimately impact sovereign debt markets, but this is a concern for the future.
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