Prudential Market Insights | June 2020

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  • 08 mins 42 secs
The Coronavirus is still featuring heavily in news at the moment, but as economies across the world start to slowly reopen, where are some of the key challenges and opportunities? Join Sahil Shaikh, Portfolio Manager at the M&G Treasury & Investment Office, for a monthly look at the global economy.


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for a monthly update on the global economy. I'm joined by Suhail Shape, portfolio manager at the M G. Prudential Treasury on investment office What's the Hill? Obviously crowing viruses still dominating headlines. But as economy, it's clearly open up the game. Where do you see the challenges and indeed, the opportunities? Actually, I think firstly, if we start off with March, the sell off was pretty indiscriminate. Equities, investment grade, global, high yield and most asset classes with down. Now, as economies open up, it is clear the pandemic has its losers and its winners, especially between between sectors. Now you think of your Amazon, where so many people are ordering online versus your traditional lead retail's. Now. Since March, I aggregate equity indices have bounced back especially like us more so than their respective credit markets. So you look at the S and P 500. It's about 10% 10% off its all time high on all the I. D and high yield spreads blew out principally in March, retraced somewhat, but I still at elevated level investors recent history. So one challenge we asked about is have equities bounced back too quickly, especially messes. Credit Now, a lot of investors look at the different sectoral compositions off the equity market, and it's very important. See that although aggregate equities have rebounded, it's been concentrated in a few sectors and a lot of the large. The kind of idiom of the strong getting stronger on you have set sectors, financials and energy. You just still pretty beaten up. So there's undoubted maybe in a rush into growth, your equities on those with strong balance sheets. Um, so in terms of opportunities for the short term, we could see a rotation to these unloved cyclical stocks. That's very, very technical. So a lot of them, from evaluation point of view, have bean completely have it, Um, and part of the whole indiscriminate selling and haven't rebounded as much now for credit. In our view, the risk off the risk of spreads blowing out to their march white unlikely Andi. That's because central banks you've had central banks to come out and explicitly say we will buy these bones so they can be an argument that there's a strong technical component off credit versus equities. Asymmetry might be a bit better in the short term, have if we look at the longer term equity. Still look attractive. Ah, a lot of equity markets, like, look at the UK equities for him. Tom, Um, a lot of the major sectors of being pummeled on does this quite a lot of value that, um I've given the continued the Brexit premium that you can experience last few years. They can be an argument made from evaluation, which is quite attractive. Um, on on the flip side, you can see, Like I said, the strong getting stronger. You could see us tech a lot of the structural things that we were anticipating. Over the next few years, I've been accelerated so they could do well, not just the fangs, but all sorts of Now that we should be cognisant, there are still near term challenges. So that's the U. S. China trade tension that's kicking off again. It could be a second wave off over 19 especially as western economies instead into their winter seasons. I always economist. Open up. So you had Germany and South Korea have opened up, and you've seen an increase infection rate. So markets have reacted positively to that. Well, no nestle positively, but not negatively they've shrugged it off and then more backward, back to home with UK there still Brexit. It still has to be done by the end of the end so we could see it. Some increased volatility incidentals. Yet well, commercial property has also been making headlines. And you will quite a lot of this asset class in your portfolios. You still comfortable with this asset class? Yeah, I'd say we're still come for a Xeni good investor. We are constantly reviewing Bassett Cross. Now it's not a secret. Some of the sectoral seems I mentioned in my earlier in this will also affect property that retailers in my mind I break down property into two components. Is the capital component in the yield From a yield point of view, the rental income still provides a attractive yield, especially vessels U K 10 year gilts, for example, especially in the current environment. Now you may see this spread compress over time. Um, as investors search for yield property still provides that attracted you. Now I should caveat that with it depends on the second you're investigating. So red collection in the retail sector is actually being around about 50 to 60% depending on different people for failures. The retail sector is not just your retail. This things like supermarkets as well, which have it again. A structural Grissom a structural argument for in in favor of them as well. So it depends on the sectors you look at office space in in London Now you could see some offices emptying out regional offices outside of the major cities might have never, um, increasing tomorrow if we look at our prime a real estate, what I mean by that is very century located high e S t score High energy efficiency can be re utilized in innovative ways or have a lot of fun. So in some of our large fund where we have direct exposure to the EU's way, you can see the demand actually increasing for this now, the lawsuit, cultural practices in the industrial sector. You, you obviously here about your major list logistical company. The Amazons of DHL's ups is my increased amounts of those. A headwind for that is that you actually have a lot of the small manufacturing sector who may go bankrupt. There may be an increasing defaults as a as a result of Covic. So it's a balance argument. I think it's still too early to to gauge the impact that code in 19 will have on the property market. Um, but again, it's not all doom and gloom there a sense sectors that may benefit will finally of recent events lead you to rethink your investment philosophy or you very much focused on the long term. So I don't think we have rethought our investment philosophy. But our beautiful expected returns for most asset classes has changed. Any good investor constantly reevaluate, Um, given, most of our exposures are active, and what I mean for that is when we invest in a USA UK, he's we invest in the active manager Romney there a strong belief that active management can really shine in this sort of scenario. Like I said, that I don't get equities are up. But there's a lot of diversions between sectors. A bottom up manager can make a lot of this. So our our approach of being long term, top down investors also, um, leveraging our underlying active managers, I think, really shine in this situation like this. Now is the opportunity as strong as it wasn't much probably not. There's, Ah, a lot of expertise have retraced, but Manager is still seeing a lot of pockets of value on aggregate level. We look at things like the EM currencies. They're down about 20% the old GM regions out there, and it s an issue. But the send off again was very indiscriminate. And you haven't seen risk appetite in those asset classes rebound. So it could be some potential and value in those spaces. Well, now, longer term, I'm definitely. Diversification is harder to achieve through traditional asset classes. If you think about government bonds being at such low yield potential, upside they have is quite limited to for any risk off event. So this is where we still look to invest in longer term assets such as real estate by their assets, which is private debt. All turns to now 1 may argue, is that effective? Kirby 19 gonna have a lagged effect on these, and it will. But I still think they provide strong diversification benefits for longer term investors. These are not things that you can tax it e trade in announcing. So in that sense are our long term philosophy. Still, homes But in the more public asset classes there, there is still value off tactical allocation, which is which is a component of all of all four failures. And there's gonna be increased importance on that as expected. Returns. Alas, it passes are can really lower, so he'll thank you. We'll do you keep an eye out for more updates on multi asset investments here on asset TV and thanks for watching him.
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