as of end of April 2020Download
as of 30/04/2020
|1M||3M||YTD||1 Y||3Y p.a.||5Y p.a.||Since Inception|
The Covid-19 pandemic has triggered shutdowns around the world and the global economy saw its worst slump in post-war history. As containment is showing first effects and new cases are plateauing, many countries are now discussing and implementing lockdown exit strategies. All easing efforts will be very gradual, while consumer and business confidence is increasingly suffering. If the tentative return to normal triggers second waves of infections, the economic damage from renewed lockdowns may prove even more harmful. In the US, the Q1 GDP was down by 4.8% qoq annualized, with consumption falling by 7.6%. A downward revision of the Q1 estimate is highly likely once more data on household spending and business activity are available. On April, 30 million people applied for unemployment benefits in the States. The already large fiscal package (12% of GDP) will be probably further increased in the coming months. In its April meeting, the Fed highlighted that the recovery might be slower than anticipated. Therefore it will keep the Fed funds Rate at 0%-0.25% until the economy is clearly recovering, it will continue its asset purchases program and it will increase credit and liquidity provision, if necessary. The Fed left the door open to new policy tools but did not mention any of them. In the Euro Area, the Q1 GDP was down by 3.3% compared with the first quarter of 2019. Manufacturing activity was hit hard as lockdown measures forced factories to close and people to stay at home: the manufacturing PMI fell to an all-time low of 33.4 from 44.5 in March and the composite PMI decreased to 18.1 from 38.5. Direct fiscal policy support from countries as well as from the EU sums up to around €450 billion. At its April meeting, the ECB announced further credit support and liquidity measures creating a pandemic emergency longer-term refinancing operations (PELTROs) program. It also further eased the TLTRO III conditions, making more appealing for banks to lend. Debt sustainability in some European countries has raised concerns. S&P kept Italy rating unchanged in April, while Fitch downgraded Italy, outside of the scheduled dates, to BBB-, stable outlook, expecting the public debt to GDP ratio to increase by 20pp to 156% this year. Global markets are taking comfort from the slower pace of contagion, hopes of medical breakthrough and policy support from governments and central banks, cutting credit tail risks, and new Covid-19 cases peaked. With the new central banks interventions, credit spread tightened. In the last month, the US 10-year yield further decreased by 7 bps (to 0.63%) and the 10-year Bund yield decreased by 13 bps (to -0.59%) due to weak macro data, low inflation perspectives and continuing monetary policy support. The Italian spread widened by 37 bps to 236 point and Iberian spread widened by around 15 bps. During April, in the euro area investment grade (IG) and high yield (HY) credit spreads tightened by 55 and 120 bps, respectively. Similarly, in the US, IG and HY credit spreads tightened by 88 and 114 bps, respectively. Even if market conditions improved materially, the supply of green corporate bonds slowed down consistently. We just participated to the new primary deal of EDP. As the total asset under management remained stable, we preferred to maintain all existing position and benefit of the market recovery. We expect more issuance in May from high quality issuers.
During the month on the credit side, the cash has been invested for about 100k in new EDP senior 2027, while on the govies and related space we subscribed the new SNCF 2030 and the new for 600k and the new CDP 2027 for 500k. Finally, the overlay strategy has been implemented through euro bond future. The portfolio’s duration was managed around the level of 9.3 years.
The central banks' worldwide accommodative stance aimed to support the economies using all their monetary policy tools, it is a positive factor for the rates environment especially for core and semi-core space. In particular, the PEPP can be considered as a backstop in Eurozone for the spread widening. Like in 2016, the CSPP (Corporate Sector Purchase Programme) should limit widening, and more so as the Fed is now also a buyer of corporate bonds. The system of government guarantees and bailout funds, as well as intense central bank buying in IG space, will reduce the liquidity risk and facilitate the reopening of primary markets. The portfolio will continue to be invested maintaining the same average rating and the same level of diversifications. The duration exposure will be managed in the range 8 - 10 years with a tactical approach.