H2 Outlook: Post Covid-19 recovery signals a more complex market

As we emerge from the Covid-19 shock, we expect market developments to eventually become more complex. In the next few weeks, the easy part of a post Covid-19 recovery will be over and by then credit and equity will be far more expensive. As we move to the next phase, we suggest adding flexible solutions to rapidly re-allocate capital either via a portfolio manager or an automated solution. Two secular themes though remain: 1) An economic rebound in China spreading to Asia Pacific, and 2) The ESG theme, which is increasingly becoming a core priority for investors, both young and old.

Two secular trends emerge
Covid-19 hit the global economy like a hammer with both supply and demand seeing shocks the likes of which we have rarely seen in over a century. Measures taken by the authorities in terms of health, support for workers and companies as well as aggressive monetary policy easing have helped temper the shock and initiate the recovery. We are now in the midst of what many expect to be a U-shaped recovery, which recent evidence suggests might be a tad quicker in the United States. The question beyond this is whether authorities have managed to stabilize long-term growth expectations which drive many long-term and short-term behaviors. Aside from Italy, government initiatives seem to be working quite well, giving us an encouraging picture of the future. The consequence has been a rally in credit and equities with the S&P500 close to all-time highs. What happens next though is more complex.

We expect the overshoot in equities to continue driven by the very aggressive monetary policy easing of central banks, fiscal expansions (including a second package in the United States) and the continued re-opening of the global economy with some temporary setbacks. One way to position for this is through Climate Funds, which typically load on second tier growth stocks. In the final phase of recovery, we could likely see an outperformance of growth and quality stocks versus value and cyclical stocks, which are more reliably valued by short-term valuation metrics such as the forward price to earnings ratio. This suggests a tilt towards growth and quality and, given the rising concentration of risk, we would suggest increasing strategies that can easily adapt to market regimes either through machines or portfolio managers.

Going forward, look for two secular themes to emerge. The rebound of the Chinese economy, should happen earlier than others, spreading to the rest of Asia over a period of one to three months. Here, we are focused on a rising middle class as well as a rich and innovative IT sector representing companies from search engines to microchip manufacturers. This can be exploited via EM equities or Bonds. Within Bonds, spreads have tightened considerably, but there are still idiosyncratic opportunities for bottom-up analysis and the odds are high that the Fed will adopt yield control (roughly 40%) and negative interest rates (roughly 60% though none expected by the market). Such a Fed policy would benefit hard currency and local currency EM bonds in countries heavily linked to the dollar. EM equities and bonds remain quite attractive to us as long-term investments.

The second secular theme, Environment, Social and Governance (ESG) investing, is likely to come even more to the fore as a crisis typically brings great changes with it, and more investors are waking up to the urgency of climate change. The status quo is increasingly being rejected and the resulting cultural changes will drive investment flows and prices. The advantage of ESG is that it typically reduces downside risks as the companies in this space tend to be better managed. Quality also often translates into performance.

The last phase of the post Covid-19 recovery will offer significant opportunities over the next two months. Beyond this, the environment is likely to become more complex from managed and automated solutions to the emergence of China and ESG. We define ourselves by our outlook and our risk management — the two likely will be important factors going forward.
Note: This is a NAM macro view, not the official Nordea view.

About Nordea Asset Management
Nordea Asset Management (NAM, AuM 204bn EUR*), is part of the Nordea Group, the largest financial services group in the Nordic region (AuM 280bn EUR*). NAM offers European and global investors’ exposure to a broad set of investment funds. We serve a wide range of clients and distributors which include banks, asset managers, independent financial advisors and insurance companies.

Nordea Asset Management has a presence in Bonn, Brussels, Copenhagen, Frankfurt, Helsinki, London, Luxembourg, Madrid, Milan, New York, Oslo, Paris, Santiago de Chile, Singapore, Stockholm, Vienna and Zurich. Nordea’s local presence goes hand in hand with the objective of being accessible and offering the best service to clients.

Nordea’s success is based on a sustainable and unique multi-boutique approach that combines the expertise of specialised internal boutiques with exclusive external competences allowing us to deliver alpha in a stable way for the benefit of our clients. NAM solutions cover all asset classes from fixed income and equity to multi asset solutions, and manage local and European as well as US, global and emerging market products.

Nordea Asset Management is the functional name of the asset management business conducted by the legal entities Nordea Investment Funds S.A. and Nordea Investment Management AB (“the Legal Entities”) and their branches, subsidiaries and representative offices. This document is intended to provide the reader with information on Nordea’s specific capabilities. This document (or any views or opinions expressed in this document) does not amount to an investment advice nor does it constitute a recommendation to invest in any financial product, investment structure or instrument, to enter into or unwind any transaction or to participate in any particular trading strategy. This document is not an offer to buy or sell, or a solicitation of an offer to buy or sell any security or instruments or to participate to any such trading strategy. Any such offering may be made only by an Offering Memorandum, or any similar contractual arrangement. Consequently, the information contained herein will be superseded in its entirety by such Offering Memorandum or contractual arrangement in its final form. Any investment decision should therefore only be based on the final legal documentation, without limitation and if applicable, Offering Memorandum, contractual arrangement, any relevant prospectus and the latest key investor information document (where applicable) relating to the investment. The appropriateness of an investment or strategy will depend on an investor’s full circumstances and objectives. Nordea Investment Management recommends that investors independently evaluate particular investments and strategies as well as encourages investors to seek the advice of independent financial advisors when deemed relevant by the investor. Any products, securities, instruments or strategies discussed in this document may not be suitable for all investors. This document contains information which has been taken from a number of sources. While the information herein is considered to be correct, no representation or warranty can be given on the ultimate accuracy or completeness of such information and investors may use further sources to form a well-informed investment decision. Prospective investors or counterparties should discuss with their professional tax, legal, accounting and other adviser(s) with regards to the potential effect of any investment that they may enter into, including the possible risks and benefits of such investment. Prospective investors or counterparties should also fully understand the potential investment and ascertain that they have made an independent assessment of the appropriateness of such potential investment, based solely on their own intentions and ambitions. Investments in derivative and foreign exchange related transactions may be subject to significant fluctuations which may affect the value of an investment. Investments in Emerging Markets involve a higher element of risk. The value of the investment can greatly fluctuate and cannot be ensured. Investments in equity and debt instruments issued by banks could bear the risk of being subject to the bail-in mechanism (meaning that equity and debt instruments could be written down in order to ensure that most unsecured creditors of an institution bear appropriate losses) as foreseen in EU Directive 2014/59/EU. Nordea Asset Management has decided to bear the cost for research, i.e. such cost is covered by existing fee arrangements (Management-/Administration-Fee). Published and created by the Legal Entities adherent to Nordea Asset Management. The Legal Entities are licensed and supervised by the Financial Supervisory Authority in Sweden and Luxembourg respectively. The Legal Entities’ branches, subsidiaries and representative offices are licensed as well as regulated by their local financial supervisory authority in their respective country of domiciliation. Source (unless otherwise stated): Nordea Investment Funds, S.A. Unless otherwise stated, all views expressed are those of the Legal Entities adherent to Nordea Asset Management and any of the Legal Entities’ branches, subsidiaries and representative offices. This document may not be reproduced or circulated without prior permission. Reference to companies or other investments mentioned within this document should not be construed as a recommendation to the investor to buy or sell the same but is included for the purpose of illustration. The level of tax benefits and liabilities will depend on individual circumstances and may be subject to change in the future. © The Legal Entities adherent to Nordea Asset Management and any of the Legal Entities’ branches, subsidiaries and/or representative offices.

Follow our latest posts