Performance, July 2020
Rising infection numbers met with stimuli and progress in vaccine development
- Global infection numbers continued to increase in July when the number of new daily confirmed cases passed 250,000. The US, Brazil and India accounted for the lion’s part of new confirmed cases. In aggregate, the three countries have reached more than 9 million people infected, and at end-July they accounted for more than half of the 18 million cases registered worldwide. The case numbers have been handled with a relatively steady hand by investors – and the reason must for instance be found in surprisingly positive economic indicators as well as extreme willingness on the part of central banks and authorities to introduce economic stimuli. In addition, there was good news about potentially coming vaccines against the disease. There were, for instance, rumours that both Moderna and Pfizer were approaching the last test phases of their vaccines. Also other companies are well on their way, and there are speculations as to whether a vaccine will already be available around year-end.
Massive rescue package adopted in the EU – and news ahead from the US
- EU countries have finally agreed on a giant coronavirus rescue package. The wording of the details has been kept in soft rhetoric and is therefore not quite clear. The agreement includes a recovery fund of EUR 750 bn of which half is in grants and the rest in loans. The package must be financed by loans with maturities up to 2058. The agreement was a reality simultaneously with the agreement on a budget for 2021 to 2027. The agreement is a strong signal about solidarity and will to lift Europe through the crisis. In the US, there are also expectations of the adoption of new fiscal rescue packages when the previous packages expire.
Sudden economic setback, but prospects of improvement
- Retrospective economic indicators showed a considerable economic setback in Q2. Moreover, economic indicators luckily showed that the bottom seemed to have been reached already. At least until further notice. Expiry of rescue packages and a second wave of corona infections may again risk putting pressure on the global economy. However, investors do not seem to discount renewed economic headwinds which cannot be offset by new stimuli and vaccine.
Increases in global equity markets were eaten up by declines of the dollar
- All in all, global equity markets continued to increase in July – driven by the US and Asia. In return, equity markets declined in both Europe and Japan. Global equity markets were up by 3.39% in terms of local currency, but the positive yield was eaten up by a decline of the dollar seen from the point of view of Danish investors. Global equity markets were practically unchanged in Danish kroner terms. Whereas equity investors were convinced that rising coronavirus figures in the US would be offset by stimuli from central banks and authorities, the rising infection numbers, lower interest rates and the prospects of a relaxed US monetary policy hit the US dollar.
Slightly declining yields in a market dominated by holiday sentiment
- In the Danish market, issue activity has been comparatively limited during most of the month. However, towards the end of the month, the supply of callable mortgage bonds increased considerably. The reason was that the term of notice for the October payment expired at end-July simultaneously with the present callable mortgage bond series being replaced by new series for which the maturity is three years longer. This results in a lower rate and consequently re-mortgaging will be less beneficial. Despite the larger supply at the end of the month callable bonds have been dominated by a higher valuation – in absolute as well as relative terms. In general, the yield level has been slightly on the decline and therefore most bonds have yielded positive returns.
Large difference between EM in local currency and EM in hard currency in July
The increase in EURUSD of 4.5% had a solid, negative affect on EM in local currency. Bond price increases and coupon rates yielded 1% but were more than eaten up by exchange rate losses of more than 3%. The large losers were countries whose currencies move in tandem with USD - for instance Russia, Kazakhstan, Ukraine, Peru and Thailand - whereas Turkey with its own crisis experienced a Turkish lira that shed 6.72%. Otherwise for EM in hard currency where the return of the month rose above 3% boosted by slightly falling US yields and a narrowing of the credit spread from 474 bp to 436 bp. We saw search against several so-called risky countries that have regained some of the lost ground since the Covid-19 crisis peaked in March. Turkey’s hard-currency bonds were, however, also affected and lost 2.79% whereas other crisis-hit countries such as Lebanon, Sri Lanka, Zambia and Argentina also delivered negative returns. Covid-19 figures and their spill-over effect on the countries’ growth, budgets and debt rates are still taken very much into account.
Credit markets in July
- The development in credit and yield spreads was highly positive in July. The High Yield spread narrowed by approx. 0.80 percentage point whereas the Investment Grade spread narrowed by approx. 0.20 percentage point. Equity volatility is usually a good indicator of the credit spread development, and in terms of the broadly recognised equity volatility indicator, the VIX index, volatility dropped back over July. Whereas the first part of the recovery was good for quality, we saw a higher demand for deep value in July, including companies within energy, consumption, entertainment, services etc.