Fynsa
The latest actions taken by the Federal Reserve, in terms of promising as much liquidity as financial institutions want and as much quantitative easing as necessary, coupled with the strong fiscal response in the US (and around the world), have helped to stabilize markets.
Whether all the measures taken so far will be sufficient depends on how quickly the pandemic is brought under control. In principle, both monetary and fiscal measures should allow time (about 6 weeks) to evaluate the health progress. If the global economic slowdown begins to extend over a longer period than estimated, additional efforts would be required and would probably also justify lower asset prices.
By 2020 as a whole, it is expected that global real GDP could contract by as much as 2.5%, approaching the levels of the financial crisis downturn.
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We have started to see the biggest impacts in the services sector(March PMIs), given the massive quarantines and the deterioration of the labor market. This could translate into a deeper recession than the financial crisis, at least in terms of the magnitude of the contraction, and a probably slower recovery of activity once the pandemic is more under control.
In this context, corporate earnings are expected to contract sharply this year. Thus, in the case of the US, the expected fall in world GDP this year would be consistent with a fall in profits of between 25% and 35% in the S&P 500.
We have a constructive view on the development of the pandemic, although it is still too early to draw more definitive conclusions, because what we will potentially face in the coming weeks is a delicate balance between the health response to the pandemic and the strategies to be taken for the gradual reengagement of the economies.
In terms of assets, we believe that the more than 20% recovery in equities (S&P 500) in the last 2 weeks is an opportunity to reassess risk, in a still uncertain economic and corporate context, in which the lows in the 2,200 point zone could be re-tested. In our baseline scenario, we set a target for the S&P 500 of 2,700 points, so the room for further upside is limited.
In corporate fixed income, we prefer high-quality credit. While volatility remains high and there remains some uncertainty about the extent of the pandemic on the economy, now that the top-rated credit markets have become monetary policy tools, we believe their spreads have probably reached a relevant peak.
In local equities, we set an IPSA target of 4,100 points, a bullish scenario of 4,800 points and a bearish scenario of 3,360 points. Today we are favoring a conservative approach to stock selection, overweighting companies that can better navigate in a scenario of recession and activity stoppages as a result of the health response to the COVID-19 pandemic, with more stable cash flow generation, reasonable leverage levels and high cash levels.
At RFL, we recommend a portfolio of bank and corporate bonds with a rating above A+ and a target duration of 3 years, mostly in UF.
