The Covid-19 global outbreak that started in early January
represents an exogenous shock to the global growth cycle, at a time when the
world economy was on the cusp of a new synchronized cyclical recovery. Driven
by this shock, our
macro framework moved into a global contraction regime in February (i.e.
global growth expected to be below trend and decelerate). This regime remains
in place today and is broad-based across regions (Exhibit 1). Furthermore,
given the increased severity of the lockdown and quarantine measures undertaken
by governments around the world, it is highly likely that most, if not
all, countries and regions will experience a significant recession in the first
half of 2020. Therefore,
we expect the economic data to deteriorate meaningfully over the next few
months. At this stage it is difficult to determine how long this macro
environment will persist. Historically, contraction regimes in our framework
have lasted on average 6 months with wide dispersions, ranging between 2 and 15
months across all episodes since the 1970s. We will continue to follow the data
and the framework as it runs its course, but it is nonetheless valuable to
compare the current downturn to recent episodes of financial turmoil, despite
meaningful differences in the source of the shock and market imbalances.
Figure 1: All regions are in a contraction regime, and are likely to deteriorate further
One thing, in
particular, stands out in today’s downturn. Policymakers have learned valuable
lessons from the Great Financial Crisis (GFC) and the European debt crisis (EDC),
and they have reacted promptly to the challenge in just a couple of weeks,
compared to the multi-month process during the GFC and EDC. This time the
fiscal and monetary policy response around the world has been meaningful in
size and scope, and in some instances extraordinary. In many cases the fiscal
response is even larger than in the GFC, with the US fiscal package equaling about
9.2% of GDP (nearly double the size of the GFC response), and Europe’s response
equaling 2.6% of GDP (compared to 2.3% of GDP in the GFC) with additional transient
and contingent debt guarantee schemes that could amount to between 10%-25% of
GDP across individual European countries, if utilized. 1 Finally,
given the typical gradual approach to stimulus removal, the fiscal impulse will
likely be substantial for years to come.
major central banks have promptly enacted measures to ease financial conditions
and ensure liquidity in the financial system, resulting in interest rate cuts
and open-ended quantitative easting. The Federal Reserve (Fed) has gone even
further, becoming the effective lender of last resort and providing financial support
to corporates both in the primary and the secondary markets. 2 Despite
the enormous uncertainty and challenge of the current situation, it is
reasonable to assume these steps should help stabilize markets, partially
mitigate the economic damage of the enforced quarantines, and support the speed
of the subsequent recovery.
While it is
difficult to anticipate the timing of the cyclical trough, we expect such a
turnaround to first occur in market-implied growth expectations, as asset
prices should discount the positive impulse from fiscal and monetary policy
ahead of the economic data (Figure 2). As in most recessions, we expect
credit markets to lead the way, signaling a stabilization in the cost of
capital and an inflection point for risky assets, ahead of earnings or earnings
Figure 2: Market-implied growth expectations not
signaling a bottom in the cycle yet
From a strategic asset allocation standpoint, for investors with a multi-year time horizon (longer than 5 years), we believe the current global sell-off represents a unique opportunity to rebalance exposures from risk assets (i.e. equities, credit) to strategic targets at much cheaper valuations.
From a tactical asset allocation standpoint (with a somewhat
less than 2-year horizon), we believe it is appropriate to take a more
selective approach to risk assets and remain somewhat defensive. Our global
60/40 portfolio total risk is marginally below the benchmark’s risk. 3 Relative to
the benchmark, we remain moderately underweight equities, primarily in emerging
markets, and overweight government fixed income, with a bias towards a steeper yield
curve. Within equities, we favor defensive factor exposures with tilts towards
low volatility, quality and momentum, while we reduced exposure to (small) size
and value. However, over the past two weeks we have moved to an overweight
exposure in credit via US investment grade and emerging markets sovereign debt,
as a first step towards harvesting attractive risk premia.
Before investing, investors should carefully
read the prospectus and/or summary prospectus and carefully consider the
investment objectives, risks, charges and expenses. For this and more complete
information about the fund(s), investors should ask their advisors for a
prospectus/summary prospectus or visit invesco.com.
1. Shares of GDP are our calculations, based on 2019
GDP figures and stated notional spending amounts in official press releases.
2. The Fed announced a program that will provide new financing
to investment grade companies through two facilities, the Primary Market
Corporate Credit Facility (PMCCF) and the Secondary Market Corporate Credit
3. 60% MSCI ACWI & 40% The Bloomberg Barclays Global
Aggregate Bond Index (USD Hedged)
measures interest rate sensitivity. The
longer the duration, the greater the expected volatility as rates change.
MSCI ACWI Index is an unmanaged index considered representative of large- and
mid-cap stocks across developed and emerging markets. The index is computed
using the net return, which withholds applicable taxes for non-resident
Bloomberg Barclays Global Aggregate Bond Index is an unmanaged index considered representative of global
investment-grade, fixed-income markets.
The opinions expressed are those of Alessio de Longis as
of April 1, 2020, are based on current market conditions and are subject to
change without notice. These opinions may differ from those of other Invesco
Diversification does not guarantee a profit or eliminate
the risk of loss.
MSCI Inc. Neither MSCI nor any other party involved in or
related to compiling, computing or creating the MSCI data makes any express or
implied warranties or representations with respect to such data (or the results
to be obtained by the use thereof), and all such parties hereby expressly
disclaim all warranties of originality, accuracy, completeness, merchantability
or fitness for a particular purpose with respect to any of such data. Without
limiting any of the foregoing, in no event shall MSCI, any of its affiliates or
any third party involved in or related to compiling, computing or creating the
data have any liability for any direct, indirect, special, punitive,
consequential or any other damages (including lost profits) even if notified of
the possibility of such damages. No further distribution or dissemination of
the MSCI data is permitted without MSCI’s express written consent.
In general, stock values fluctuate, sometimes widely,
in response to activities specific to the company as well as general market,
economic and political conditions.
The risks of investing in securities of foreign
issuers, including emerging market issuers, can include fluctuations in foreign
currencies, political and economic instability, and foreign taxation issues.
Derivatives may be more volatile and less liquid than
traditional investments and are subject to market, interest rate, credit,
leverage, counterparty and management risks. An investment in a derivative
could lose more than the cash amount invested.
Interest rate risk refers to the risk that bond
prices generally fall as interest rates rise and vice versa.
An issuer may be unable to meet interest and/or
principal payments, thereby causing its instruments to decrease in value and
lowering the issuer’s credit rating.
Junk bonds involve a greater risk of default or price
changes due to changes in the issuer’s credit quality. The values of junk bonds
fluctuate more than those of high-quality bonds and can decline significantly
over short time periods.
Because the Subsidiary is not registered under the
Investment Company Act of 1940, as amended (1940 Act), the Fund, as the sole
investor in the Subsidiary, will not have the protections offered to investors
in U.S. registered investment companies.
The performance of an investment concentrated in
issuers of a certain region or country is expected to be closely tied to
conditions within that region and to be more volatile than more geographically
The Fund is subject to certain other risks. Please
see the current prospectus for more information regarding the risks associated
with an investment in the Fund.
Invesco Distributors, Inc. is the US distributor for
Invesco Ltd.’s retail products and collective trust funds, and is an indirect,
wholly owned subsidiary of Invesco Ltd.