June 2020 Commentary

June saw another strong performance for risk assets, capping off an astonishing quarter that has seen all non-currency assets with a positive return over the last three months. Obviously that comes on the back of an appalling Q1 when financial markets reacted to the coronavirus pandemic, but the gains from Q2 now means that generally speaking asset classes have recovered most of the year-to-date losses, and some even posting positive returns. Much of these gains have come about thanks to slowing rates of case growth and moves to reopen major economies, as well as remarkable levels of stimulus from governments and central banks across the world. However, in the last couple of weeks there’ve been signs once again of an acceleration in case growth in some countries, including the United States, raising fears for where things might be heading in the second half.

Credit markets bounced with healthy levels of liquidity in secondary markets, as continued central bank support measures played their part coupled with stronger participation from market participants. The primary market continued its show of strength during the month of June, as corporates took advantage of the supportive environment to sure up funding for the foreseeable future. Indeed, primary issuance is expected to taper towards the end of H2 on a comparative basis, as most the corporate funding needs would have been met.

In Europe, the activity by the ECB remained supportive for credit markets, helping to push spreads tighter. In the real economy, a V-shaped scenario is looking less likely, as companies continue to struggle with the latent pick-up in activity. Many headline-grabbing names have announced major cuts to their workforce or outright defaulted.

From the data front, European data was mixed as the economic impact as a result of covid-19 remains significant with economic numbers showing depressed activity levels. Looking at Europe’s largest economy, Germany, PMIs improved but remained below the expansionary level. For the month of May Manufacturing PMI, increased to 45.2, compared to a consensus estimate of 44.6, and a previous reading of 36.6. Meanwhile, unemployment ticked higher to 6.4% compared to 6.3% in May, while leading indicators such as the Eurozone Consumer Confidence, remained weak coming in at -14.7, in line with expectations, compared to a previous reading of -18.8.

Meanwhile, the Euro Area’s Manufacturing PMI, pointed to a continued contraction in factory activity, albeit showing signs of recovery, with a reading of 47.4 compared to 39.4 in the previous month, above expectations of 46.9, edging towards expansionary territory. Similarly, Euro Area’s services PMI was 48.3 in its latest reading, significantly higher than the 30.5 recorded in the previous month, and above consensus. Unemployment continued its upward trajectory to 7.4% from 7.3%, below economists’ expectations of 7.7%.

Looking at sovereign yields on the 10-year German Bund, Europe’s mostly sought benchmark closed marginally tighter than the previous month at -0.453 compared to -0.448 at the end of last month after some widening in the first week in June. Yields across all of the curve tightened, with a larger movement in the longer end of the curve largely attributed to an increase in expectations for when activity levels will return to pre-Covid levels. Bund performance remains in positive territory (+2.3%) since the start of the year. Within the HY asset space, yields in June generally tightened, following the risk on approach by the markets that is interpreting a much more swift economic recovery, following the re-opening of a number of economic sectors, in addition to continued fiscal and monetary support measures. A stronger recovery was witnessed in European High Yield compared to the US, however this was largely attributed to the lagging performance of European debt over the past two months.

The CC Euro High Income fund, bounced higher by 2.1 percent, in line with the upward market moves. On a year-to-date basis, the fund is slightly underperforming on a net basis due to the lower beta of the portfolio, albeit the volatility of the fund has been markedly lower than average.Throughout the month, the manager continued to reduce exposure to bonds listed on the Malta Stock Exchange with the scope of re-allocating to selective higher beta names, including the financial sector, which offered significant opportunities.Moving forward the Managers believe that credit markets will continue to be aided by the support of primarily monetary politicians, creating a positive technical environment. In terms of bond picking, the Managers will continue to monitor the current environment and take opportunities in attractive credit stories.