KBC Investment Strategy Presentation Dynamic June 2020
Investment strategy Dynamic Investment climate Substantial economic contraction, uncertain outlook Key rate trends and outlook 3,0 3,0 ▪ Initial estimates suggest that the euro area, the US and China underwent a sharp economic contraction in the first quarter of 2020 as a result of the coronavirus crisis. 2,0 2,0 ▪ As the lockdown was not introduced until the middle of March in most regions, this figure reflects only the economic downturn at the end of the quarter; despite this, the USA 1,0 1,0 figure is worse than expected. It suggests that the coronavirus crisis has brought the EMU economy to a halt very quickly. 0,0 0,0 ▪ We think the economies will go through a particularly deep recession this year, -1,0 -1,0 followed by a strong recovery in 2021. The contraction of Western economies in the 06-2015 06-2016 06-2017 06-2018 06-2019 06-2020 second quarter of 2020 is likely to be particularly severe. ▪ The outlook is of course highly uncertain. ▪ As several countries are beginning to ease the lockdown measures fairly rapidly, the Ten-year interest rate developments and prospects 5,0 5,0 risk of new waves of infection has increased. This has also increased the risk of new Ten-year interest rate USA lockdowns and an even worse economic outcome. Ten-year interest rate Germany 3,0 3,0 Disastrous first quarter in Europe 1,0 ▪ The provisional growth figures for the first quarter in a number of euro area countries 1,0 confirm that the coronavirus crisis is having an unprecedented negative impact on the -1,0 economy. ▪ Some countries have been hit harder than others. -1,0 -3,0 ▪ The downturn in France, for example, has been greater than in Germany, possibly 05-2015 05-2016 05-2017 05-2018 05-2019 05-2020 because the service sectors account for a larger share of the French economy. Business confidence indicators also suggested that the service sectors had been hit harder than industry. ▪ Given the earlier than expected easing of the lockdown in the euro area, we think the recession will be slightly less deep than originally thought. ▪ At the same time, however, reports concerning corporate investments, the labour market, private consumption and world trade suggest that the economic recovery following the recession will also be less powerful. ▪ It will therefore take longer for GDP in the euro area to reach pre-crisis levels.
Investment strategy Dynamic Investment climate Unprecedented shock in the United States ▪ Several states in the United States (US) are reopening even before there are any clear signs of a reduction in the number of coronavirus infections or deaths. The risk of new lockdowns in the near future is accordingly increasing. ▪ Meanwhile, the US unemployment rate has already risen to 14%. This makes it likely that the recovery from recession in the US, too, will take place only gradually. Central banks dampen stock market volatility ▪ Calm has returned to the financial markets, in parallel with the radical policy measures taken by the US Central Bank (Fed) and the European Central Bank (ECB). ▪ Despite this, interest rate spreads between the euro area countries remain relatively high, reflecting the uncertainty about the extent of European solidarity.
Investment strategy Dynamic Investment climate Mixed signals on Chinese recovery Trend in EUR/USD exchange rate and fair valuation ▪ China appears to have passed the worst of the crisis. 1,6 1,6 ▪ The number of new Covid-19 infections is fairly limited and the majority of the Chinese economy is up and running again. Real growth is expected to recover in the second 1,4 1,4 quarter. ▪ However, the indicators paint a mixed picture of the strength of the recovery. 1,2 1,2 ▪ One positive note is that investments in industrial production are showing a clear recovery. 1,0 1,0 ▪ The confidence indicators (Markit Purchasing Managers Index) give some cause for concern, however. 0,8 0,8 05-2005 05-2008 05-2011 05-2014 05-2017 05-2020 ▪ This could suggest that the negative consequences of coronavirus on the world economy are also impacting on the economic recovery in China. ▪ Recent signs that the American-Chinese trade war could reignite are also a factor Inflation here. 5,0 5,0 ▪ In addition, Chinese retail sales are recovering more slowly than had been hoped. Inflation EMU Inflation USA 4,0 4,0 Unprecedented oversupply on the oil market 3,0 3,0 2,0 2,0 ▪ Coronavirus has also hit the oil markets hard. ▪ The oil price has plummeted to its lowest level in many years, though there has been 1,0 1,0 some stabilisation in recent weeks. 0,0 0,0 ▪ However, the unprecedented glut means the market is still a long way from being in calmer waters. -1,0 -1,0 06-2015 06-2016 06-2017 06-2018 06-2019 06-2020 ▪ The new decision by OPEC+ (Organisation of the Petroleum Exporting Countries) to cut production by 10% could partially limit the record imbalance between supply and demand, but a genuine restoration of that balance will require a significant increase in demand.
Investment strategy Dynamic Portfolio allocation Overall portfolio Equity and bond returns for the past year 120 ▪ In our investment strategy, we are keeping shareholdings below their benchmark level Bonds 115 for the time being. 110 Equities ▪ A combination of the following elements will be necessary before the equity card can be 105 played once again: 100 ▪ slowing down and flattening in the rate at which the number of infected people is 95 90 increasing, which will indicate that the spread of the coronavirus worldwide is being brought under control; 85 80 ▪ bottoming out of leading economic indicators; 70 75 ▪ adjusted and realistic earnings forecasts. The analyst community still seems to 05-2019 08-2019 11-2019 02-2020 05-2020 be expecting unrealistically high corporate earnings. Downward adjustments are in euros, index 100 = -6 months inevitable. ▪ Given the extremely low interest rates (even negative in some cases), we remain invested below the benchmark level for bonds. Dynamic Allocation Change Benchmark ▪ We are parking the remaining assets in cash positions in euros. Equity exposure 50.00% 0.00% 55.00% Bonds 42.50% 0.00% 45.00% Alternative investments 4.00% 0.00% 0.00% Cash 3.50% 0.00% 0.00%
Investment strategy Dynamic Bonds portfolio Bonds deployed chiefly as a buffer Yield spread between government and corporate bonds in the euro area ▪ The bond component primarily serves as a solid buffer relative to our equity positions. 300 300 ▪ Despite low interest rates, we are focusing our government bond portfolio on short- AAA AA A BBB 250 250 dated paper issued by euro-area countries to counterbalance fluctuations on the stock markets. 200 200 ▪ Our corporate bond holdings are at benchmark level. 150 150 100 100 50 50 0 0 05-2015 05-2016 05-2017 05-2018 05-2019 05-2020 Allocation of Bond Portfolio Allocation Benchmark By Currency Euro 97.62% 100.00% USD 0.42% 0.00% Other 1.96% 0.00% By Bond Type Euro Sovereigns 60.08% 70.00% Euro Corporates 31.59% 30.00% Emerging Markets 0.11% 0.00% Others 8.22% 0.00%
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