The new equilibrium is going to be very different from the one investors were used to in the last decade of low inflation and low rates but for now their focus should be to stay in cash, stay in some risk assets and stay active, according to Amundi Asset Management.
The COVID-19 crisis reinforced the need to be active and selective, as it would transform the world and the aftershocks have just started. However, the path to reach a new equilibrium will oscillate and propagate through waves, the firm said.
Although external intervention impacted capital markets structure, making price discovery, chaotic and full of traps, a first wave could benefit some asset classes that are distorted by these interventions.
At the same time, some overreaction could create compelling long-term opportunities.
“We are seeing this in sectors such as airlines, where all companies have been almost indiscriminately affected, but where those with strong balance sheets will be able to navigate these stormy waters,” the manager said.
“The way the system readjusts will also have significant implications on a new battle that is opening up, the one of inflationary versus disinflationary forces.”
Following this, while in the short-term the collapse in global demand favoured the disinflationary front, the economic cure for the crisis (debt creation with monetisation of debt, regionalisation versus globalisation in trade dynamics) could prove to be inflationary.
Also, there was clearly a battle between bull and bear forces with extraordinary policy actions continue to propel market sentiment (signals of virus-peaking in Europe and hopes of sooner-than-expected re-opening) but, on the bear side, deteriorating fundamentals from the earnings season and the sustainability of the mounting debt pile would be key risks.
However, the more important duel would be between liquidity and solvency in which the focal point that could shift power from one side to the other is the pandemic’s evolution and how long it would last is the key variable that would determine the shape of the recovery, which now appears likely to be U-shaped, with a long bottom phase and the slow recovery.