German constitutional court
On Tuesday the German constitutional court decided that the Bundesbank would stop participating in the ECB Quantitative Easing program known as PSPP in three months unless corrective measures were taken. These include oversight by the German parliament and government and questions regarding whether the ECB was directing fiscal policy which is not in its mandate. The ECB will need to review the text and likely adjust its program. Opponents of Quantitative Easing are likely to move against the unrestricted Covid-19 Quantitative Easing program with more success. While the market has taken calmly this decision, it is nonetheless an unhelpful development. We expect though that this risk will easily fade before coming back weeks from now.
Constructive on risk in troubled markets
While we remain constructive on risk, the next few days could be difficult if the German constitutional court decides to ban or limit the ECB’s Quantitative Easing program known as PSPP. Furthermore, the process of escalation against China by the United States is likely to ramp up with an eye on the presidential elections and partially extricating the US from China due to its extreme dependency on the country for medicines and raw materials. Such actions are unlikely to be exclusive to the United States and should propagate in the West as many clamor for local stable blue collar jobs.
But far more powerful than this is the aggression of governments and central banks as the world economy re-opens. Everything else is a side show. A medicine has been found to shorten the duration of the illness and likely more will come with the World Health Organization forecasting a vaccine in eighteen months. The impact of coronavirus cures will be felt in waves as medical advances steadily push the world economy along.
Implications
We remain constructive on risk and see the current period of volatility as an opportunity. The global climate and environment megatrend, for example, continues strongly. Current affairs are a timely reminder that diversification and automated or flexible strategies significantly enhance the risk return of a portfolio.
The slow Asian rebound
The recent slew of Asian PMIs showed contractions across the board in April and a recovery in China. This included Taiwan and South Korea which have very ably managed the Covid-19 crisis. On a more positive note, Chinese PMIs showed either a very shallow expansion or a moderate contraction. This V/U shaped recovery, centered on China, should continue to propagate throughout Asia. In coming months, Asia’s middle class and IT/high-tech infrastructure should rebound progressively with the help of central banks and their governments.
Implications
We view corrections in Asia Pacific/EM equities as opportunities. Portfolio managers should continue to leverage the transformative forces of the high-tech industries and a growing middle class.
