A number of indicators signal that financial markets are stabilising after the initial impact of the coronavirus crisis, says Beat Thoma, chief investment officer at Fisch Asset Management in Switzerland.
Various indicators that have so far been reliable have signalled that the situation is stabilising. The downward momentum of the Weekly Fed Economic Index is clearly decreasing and unemployment figures in the US are likely to have passed their peak. This is crucial for restoring future consumer confidence.
Additionally, reliable early warning indicators, such as the price of copper or the yield curve structure, are providing more positive signals once again. In addition, the upward trend of the US dollar is losing strength, which is providing relief for many emerging markets and giving local central banks greater room to manoeuvre. Inflation also remains under control, allowing continued ultra-loose monetary policy to persist worldwide.
Nevertheless, we are keeping an eye on the numerous risks that remain. In particular, a second wave of the virus or delays in vaccine development cannot be ruled out. Short-term technical market indicators (market breadth and market sentiment) are currently neutral and may deteriorate again at any time. At the same time, monetary impulses are marginally diminishing, and even with a vaccine available in a few months' time the economy will only slowly gain momentum.
Therefore, a general all-clear is not appropriate and caution remains the top priority when investing. Our current preferences lie in the selection of debtors that can survive a prolonged recession thanks to their superior credit quality. We are increasing our risk exposure across all our strategies from defensive to neutral, due to improvements in visibility and the forward-looking indicators we look at.
We are also taking into account the regional and sectoral differences during a potential recovery and positioning ourselves accordingly. In particular, some sectors will benefit more from the availability of vaccines than others. It is possible that traditional growth sectors that have been favoured so far will lose relative strength in favour of distressed sectors. These include transportation and leisure, or more generally, the services and consumer sectors, as well as cyclical sectors.
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