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Portfolio positioning for the summer

  • Financial Analyst
  • Blog post submitted on 20th July 2020
White_house_tom

The market back-drop for the next couple of months is one of an expectation of further support on a monetary and fiscal level from government and supra-national authorities. Indeed, the EU is reportedly close to finally getting its mega stimulus package over the line, with detractors reportedly being close to reaching consensus in the early hours of this morning.

Furthermore, talks on a new coronavirus stimulus package will start at the White House today with the priority being to expedite development of therapeutics and vaccines for the coronavirus, and the manufacturing sector, particularly bringing jobs back to the US from abroad. President Donald Trump’s chief of staff said that “It looks like that new package will be in the trillion-dollar range, as we have started to look at it, whether it’s a payroll tax deduction, whether it’s making sure that unemployment benefits continue without a disincentive to return to work.”

The divergence between the market and the real economy is likely to continue, but could show some improvement as activity recovers. Leading indicators are already showing signs of improvement, as mobility continues to pick up with lockdowns being lifted and new outbreaks being dealt with locally. Risky assets are set to be buoyed in this environment, however key to the support is the decisive monetary and fiscal policies that have driven real yields to historic lows, reduced volatility and improved liquidity.

Given the favourable macro factors, at this point we would be more comfortable positioning our portfolios to take more risk. We expect credit to continue to perform, and possibly outperform. Central bank support has reduced refinancing costs, helping companies improve their balance sheet liquidity. This is helping to reduce the number of downgrades and defaults. As such, we look to increase our positions in high yield names selectively.

Our base case in both the equity and high yield space is that lagging cyclicals and sectors which have underperformed the recovery are set to perform should the macro scenario play out, and the Covid-19 virus cases remain under control. Sectors of interest are banks and consumer discretionary, the former of which are reporting better than expected results in the US earnings season on the back of trading and investment banking fees, despite the lower yield environment.

The outlook for investment grade credit performance remains more mixed, with positive influences from stimulus efforts by central banks, countered by the fact that rates are already very low, and with a shift out of money market funds to more risky assets, yields on government bonds will slowly increase as curves steepen, which could weigh on returns as prices of products such as US treasuries drop.

The consensus by analysts for oil prices is that they remain poised to extend their recent recovery in the second half of the year. The pace of this recovery is expected to remain modest in Q3 but accelerate in Q4, which ultimately will be supportive US high yield credit and energy related stocks.

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