The Janus Henderson Global Snapshot explores the themes driving markets, the trends to watch, market returns and metrics, and the Multi-Asset Team’s outlook for regions and sectors at quarter end.
Policy response to crisis creating potential for medium-term inflationary boom
Congress passed the US$2.3 trillion Coronavirus Aid, Relief and Economic Security (CARES) Act, incorporating direct fiscal relief of about 8% of GDP. The Federal Reserve expanded its balance sheet by US$1.6 trillion or 37% in the four weeks to 1 April.
A partial reopening of the economy was reflected in a recovery in the Caixin / Markit Purchasing Managers’ Composite Output Index from 27.5 in February to 46.7 in March – still the second lowest in 11 years. Services firms continued to fare worse than manufacturers.
The government approved a record ¥108 trillion support package involving additional fiscal spending of about 3% of GDP. The Bank of Japan announced a small increase in asset purchases but maintained its “yield curve control” policy targeting a zero yield on 10-year government bonds.
German fiscal surprise
Yield spreads narrowed after the ECB launched the €750 billion Pandemic Emergency Purchase Programme (PEPP), to be completed by end-2020 and allowing short-term targeting of QE support. The fiscal response varied across countries, with Germany announcing the largest stimulus package.
New Chancellor Sunak announced fiscal support measures expected to cost at least 4-5% of GDP in 2020, while the Bank of England cut rates to a record low and launched another £200 billion of QE. The government resisted calls to extend the Brexit transition period beyond the end of 2020.
The scramble to raise US dollar cash contributed to a record portfolio capital outflow from emerging markets in March. More than 90 poor and middle-income countries sought emergency financial assistance from the IMF’s US$1 trillion war chest.
Trends to watch:
Money growth was picking up before the coronavirus shock but surged in response to Fed actions and as firms drew down credit lines. This is encouraging for eventual economic recovery prospects but sustained monetary strength would signal rising medium-term inflation risks.
The slump and rebound in manufacturing PMI new orders echoes the behaviour of US ISM new orders after the 911 terrorist attacks. The comparison suggests a further pick-up but China’s recovery may be delayed by an export hit from economic shutdowns elsewhere.
There are some positives relative to other economies: virus disruption may be less severe, Japan benefits more from a low oil price, the yield curve control policy allows full monetary financing of deficit spending and 20% of exports go to recovering China.
The ECB’s PEPP bazooka stemmed a widening of sovereign yield spreads but upward pressure could resume if eurozone governments fail to agree on a joint-liability financing mechanism for crisis spending and recovery programmes in the worst-affected economies.
Sterling at risk
The current account deficit narrowed in 2019 but could rebound unless a surging fiscal deficit is offset by higher private saving. Sterling has held support but foreign investors may look askance at a cocktail of rising deficits, record low rates and the end of 2020 EU trade uncertainty.
A turnaround in EM fortunes hinges on a reversal of US dollar strength. The Federal Reserve’s liquidity injections have dwarfed those by other major central banks and may prove sufficient to satisfy dollar demand, suggesting an easing of EM capital outflows.
Source: Janus Henderson Investors at 31 March 2020. These comments are the views of Simon Ward, Economic Adviser, and should not be construed as investment advice. These views may differ from those of other Janus Henderson fund managers.
KEY MARKET DATA
|Equity market returns for Q1 2020 (%)||Qtr local currency||YTD local currency||Qtr sterling||YTD sterling||Qtr dollar||YTD dollar|
|US S&P 500||-20.0||-20.0||-14.5||-14.5||-20.0||-20.0|
|Euro area: Euro Stoxx||-24.9||-24.9||-21.6||-21.6||-26.6||-26.6|
|UK: FTSE All Share||-26.0||-26.0||-26.0||-26.0||-30.7||-30.7|
|MSCI Far East ex Japan (US$)||-||-||-11.5||-11.5||-17.1||-17.1|
|MSCI Emerging Markets (US$)||-||-||-18.7||-18.7||-23.9||-23.9|
Source: Refinitiv Datastream, Janus Henderson Investors, index price returns, as at 31 March 2020.
Euro area: EU member states using euro currency (currently 19)
Asia: China, Hong Kong, Indonesia, Malaysia, Philippines, Singapore, South Korea, Taiwan, Thailand, Vietnam
BRICs: Brazil, Russia, India, China
World: G10, Eastern Europe & Africa, Asia, Latin America, Middle East.
|Forecast P/E 2020||Forecast P/E 2021||Forecast EPS growth 2020 (%)||Forecast EPS growth 2021 (%)|
Source: Refinitiv Datastream, Janus Henderson Investors' calculations, and IBES (institutional Brokers' Estimates System) estimates for MSCI Indices as at 31 March 2020. Forecast EPS (earnings per share), Forecast P/E (price-to-earnings ratio).
|Consensus GDP growth forecasts (%)||2020||2021||2022|
Source: Bloomberg, economic forecasts, as at 9 April 2020. Forecast GDP = real gross domestic product.
|Consensus inflation growth forecasts (%)||2020||2021||2022|
Source: Bloomberg, economic forecasts, as at 9 April 2020. Forecast CPI = consumer price index.
|Bonds (%)||31 Mar 2020 yield||Qtr return %||YTD return %|
|US 10-year Treasury||0.67||-13.84||13.84|
|Japan 10-year government bonds||0.02||-0.34||-0,34|
|Germany 10-year bund||-0.46||2.86||2.86|
|UK 10-year gilts||0.31||4.87||4.87|
|Corporate bonds: (Barclays Global Aggregate Corporate Index $)||-||-4.67||-4.67|
|High yield: (Merrill Lynch Global High Yield $)||-||-14.10||-14.10|
|Emerging market debt (JPM Global Emerging Markets Debt $)||-||-11.76||-11.76|
Source: Refinitiv Datastream, Janus Henderson Investors, as at 31 March 2020.
|Currencies and commodities||31 Mar 2020||Qtr change %||YTD change %|
|S&P GSCI Total Return Index $||1494.34||-42.35||-42.35|
|Brent oil ($/barrel)||22.60||-65.92||-65.92|
|Gold bullion ($/Troy oz)||1612.10||6.02||18.66|
The above data is intended for illustration purposes only and is not indicative of the historical or future performance or the chances of success of any particular strategy. References made to individual securities should not constitute or form part of any offer or solicitation to issue, sell, subscribe or purchase the security.
Please note the below are the views of the UK-based Janus Henderson Multi-Asset Team at quarter end. They do not represent a Janus Henderson house view or the views of individual fund managers and should not be construed as investment advice.
Positive Neutral Negative
|Global corporate||High volatility as spreads widened in the liquidity driven sell-off. Still pricing in a bearish economic scenario despite the recent rally.|
|UK gilts||Historically low yields limit upside but still plays a hedging role. Valuations of high-quality credit looks more appealing given the duration characteristics.|
|Global sovereign||Historically low yields limit upside but still a role as a hedging asset. US Treasuries perhaps the most compelling given more room for capital return.|
|Emerging market debt||Country-specific risks remain a headwind but tempering dollar strength and spreads that remain at elevated levels may offer some interesting opportunities.|
|High yield||The looming default cycle is a likely headwind but central bank buying is a game changer. Economic backdrop still challenging for these equity hybrids.|
|UK||Oil and dividend cuts have hurt this high yielding international market. Any sterling strength also drives relative returns across FTSE 100 stocks.|
|Europe||A high beta cyclical region that has limited fiscal or monetary tools left to boost activity or market levels.|
|US||Sell-off has brought valuations down to long-term averages but ongoing uncertainty about earnings. A generally higher quality market suits outlook.|
|Japan||Performance has offered diversification versus other markets but the delayed virus response is a worry for corporate activity and earnings..|
|Asia||Asia was first into crisis and markets have led the way out and any positive news around the virus could benefit this economically-sensitive region.|
|Global emerging markets||Fears about virus feeding into the region are growing as China and Asia begin to exit crisis and markets recover.|
|£/$||Huge Fed stimulus and high yield asset purchases may have offered a route to US dollar weakness, while sterling has looked attractive based on various metrics.|
|£/€||Europe and UK are in similar positions on COVID-19 and could potentially benefit from any US dollar weakness. Meanwhile, it has all gone quiet on Brexit.|
|£/¥||Investors have perceived the yen as offering a potentially 'safe-haven' status given the positive correlations shown by many asset classes.|
|Property||Lower bonds yields made property look attractive but not relative to history, while areas such as retail have looked unappealing.|
|Gold||This traditional hedging asset has been in demand by investors amid elevated volatility and in particular as the virus fades and stimulus drives inflation over the medium term.|
|Oil||OPEC production cuts amid the oil war at the start of 2020 have been positive but may not be enough. Pause in economic activity a continued pressure on demand.|
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