May 2020 Commentary
Risk assets have continued to rally throughout the month of May as the gradual re-opening of economies increased optimism for a V-shaped economic recovery from the virus induced turmoil. The strength of the asset price recovery continues to be buoyed by ongoing strong government policy and central bank interventions. That said, in our view, the propagation of the shock to financial markets due to the virus outbreak remains directly linked to the evolution of the virus and the dynamics of the containment measures.
Credit markets have seen healthier liquidity in secondary markets, as continued central bank support measures played their part coupled with stronger participation from market participants. The primary market increased pace throughout the month of May following a standstill month in March, as many corporates were comforted by central banks intervention which kept volatility low, while appetite in the primary re-emerged.
The more agile approach from the U.S. remains crucial in transmitting market confidence. The U.S. launched an additional $484 billion relief package, including a $321 billion top-up of its funding for small businesses. That takes the fiscal support passed by Congress to nearly $3 trillion to tackle pandemic woes. Moreover, the Federal Reserve built on its “whatever it takes“ approach to help the economy through the coronavirus shock and ensuring markets function properly. According to economists worldwide, the Fed’s balance sheet will more than double to $11 trillion by year-end. Indeed, central bank policy has moved from mostly alleviating the dysfunction of market pricing and tightening of financial conditions to ensuring credit flows to businesses and local governments. The recently announced extraordinary measures by central banks, including purchases of corporate debt provide a favourable back -drop for credit. Even before these measures have come into effect, risk assets have reversed most of the March lows, with subsequent monetary injections expected to further increase asset prices in the medium term.
Indeed, the Fed intervention is anchoring the front-end of the Treasury curve. However, the long-end has sold off on increasing long term inflation expectations with the 5y5y Inflation swap rate hovering at the 1.6 percent levels, way above the inflationary expectations in Europe. The manager therefore expects spreads to widen consequently, with many long-end investors such as pension funds, life insurance companies and many Asian investors soaking up the volume via their focus on yields.
From the macroeconomic front, the U.S. reported an improvement in Manufacturing, with the PMI increasing to 39.8 from 36.1 in May, pointing to a partial revival in the manufacturing sector. Similarly, U.S. Services PMI bounced, with surveys expecting it to increase to 36.9 from 26.7 in the previous month; however, the reported figure was 37.5. Despite the sharp uptick in asset prices, business confidence remains on the fence. Treasury yields remained hovering around record lows, the U.S. mostly sought benchmark; the 10-year Treasury yield, tightened marginally by 0.5 basis points for the month of May, closing the month at 0.641 per cent.
The CC Global High income fund continues to outperform comparatively given its underweight position in Energy names, despite a recovery in the sector as the price of oil recovered substantially from its multi-year lows. In the month of May the fund registered an 8.4 percent increase and continues to outperform its internal comparative benchmark by circa 150bps. Going forward the Manager believes that credit markets will continue to be supported by the actions taken by the Fed as well as the uplift from the easing covid restrictions. To this end, the Manager believes that the fund is well positioned to navigate the current volatile environment.
