Virus – Europe vs the US.
Covid cases in the US have been accelerating at an alarming pace, with the 7-day moving average in new cases rising above 160k a day. More worryingly, the percentage of GDP affected by serious Covid situations is also growing. According to our research, c.35% of US GDP is affected by a ‘critical’ (or red) Covid situation, up from 10% at the start of the month. Further, 19% of GDP is in the ‘orange’ territory, up from 15% at the start of November. On a more positive note, Europe’s widespread lockdown measures have demonstrated to be useful in curbing the accelerating pace of new cases, with 7-day moving averages falling around the region’s worst-hit countries. If the US were to impose stricter and broader lockdowns, they will likely have an impact after a few weeks, therefore we view Europe as being a leading indicator here until a vaccine is widely available.
Central Banks – More Stimulus, please.
ECB and Fed officials have been hinting towards continued easing into the December meetings. Our view into the last ECB meeting of the year remains a likely ‘recalibration’ to stimulus as a €400-500bn increase in PEPP purchases, an expansion of the TLTRO program, and potentially a broadening of eligible assets for purchases (e.g. “fallen angels”). This was reinforced by Christine Lagarde’s comments last week on the ECB’s unchanged plan to add to monetary stimulus. Further, we also expect the Fed to reassess its monetary stimulus in the December meeting, with a potential extension to their large-scale asset purchase program into 2021. As global central banks provide an anchor, carry trades remain supported, as rates fail to widen even despite the recent equity rally. Credit is thus likely to remain broadly supported into early 2021.
Markets – Trading the recovery.
Reflation and reopening sectors, including energy, financials, retail and travel, have continued to do well in the past week. The EuroStoxx50, an example for value-equity, has increased +8% since November 6th, although remaining down 4% YTD. In credit, EM local currency debt, EUR high-yield corporate credit and Additional Tier 1 financial debt have performed best with ca. +1.5%, while US credit has lagged. Although we see less upside in indices and benchmarks, we continue to see entry opportunities in unloved cyclical sectors including energy and travel. In particular, we continue to increase our allocation to convertible debt, offering equity upside while providing a floor at a positive yield.
To read more on our latest views, please see our Silver Bullet | The Anti-Bubble Portfolio or visit our Insights section.
This document is issued by Algebris (UK) Limited. The information contained herein may not be reproduced, distributed or published by any recipient for any purpose without the prior written consent of Algebris (UK) Limited.
Algebris (UK) Limited is authorised and Regulated in the UK by the Financial Conduct Authority. The information and opinions contained in this document are for background purposes only, do not purport to be full or complete and do not constitute investment advice. Under no circumstances should any part of this document be construed as an offering or solicitation of any offer of any fund managed by Algebris (UK) Limited. Any investment in the products referred to in this document should only be made on the basis of the relevant prospectus. This information does not constitute Investment Research, nor a Research Recommendation. Algebris (UK) Limited is not hereby arranging or agreeing to arrange any transaction in any investment whatsoever or otherwise undertaking any activity requiring authorisation under the Financial Services and Markets Act 2000.
No reliance may be placed for any purpose on the information and opinions contained in this document or their accuracy or completeness. No representation, warranty or undertaking, express or implied, is given as to the accuracy or completeness of the information or opinions contained in this document by any of Algebris (UK) Limited , its members, employees or affiliates and no liability is accepted by such persons for the accuracy or completeness of any such information or opinions.
The distribution of this document may be restricted in certain jurisdictions. The above information is for general guidance only, and it is the responsibility of any person or persons in possession of this document to inform themselves of, and to observe, all applicable laws and regulations of any relevant jurisdiction. This document is for private circulation to professional investors only.
© 2020 Algebris (UK) Limited. All Rights Reserved. 4th Floor, 1 St James’s Market, SW1Y 4AH.
