06 August 2020
While systematic investors do not use forecasts on global markets or the global economy in the same way, Frédéric Desobry says there are data points showing that a rebound is happening.
Even if there is a second wave of infections, will we remain out of lockdown?
Lockdown started in the UK on 23 March. Easing measures introduced in early July, so after a little more than three months of strict lockdown has been what almost feels like a return to some sort of normality. Schools, restaurants and pubs are reopening and people have been able to meet and even to travel. The numbers from new infections do not seem to have increased as a consequence; that's probably true for most of Western Europe. But we are now also seeing countries such as Japan and Australia experiencing increasing infections or fatalities, or both, so the implicit question, other than whether there is going to be a second wave in Western Europe is if there is one what can we expect its economic impact to be. Part of the concern from an economic standpoint that is of course is that a second wave could lead to renewed lockdown restrictions and weight negatively on the rebound that the global economy has been experiencing so far. I think any uncertainty is probably moderate compared to what we experienced in the first part of the year; the lessons learned are there. There is overall a much better understanding of what the risks are and as a whole the population has been educated in how to cope with these difficult times including from a health perspective. Processes have been introduced and after the initial set of strict national lockdowns we are now seeing more local measures being deployed, much more targeted in the sense that they affect certain cities, certain industries, certain types of activities and they can be rolled back separately if needed. So from an investment perspective I feel uncertainty has reduced. Whether or not there is a second wave and whether any second wave results in a renewed strict lockdown, there is less uncertainty on the measures, be they social, monetary or fiscal, which can be adapted, and what their impact may be.
Are we entering a return to growth phase for markets and economies?
As systematic investors we do not use forecasts on global markets or the global economy in the same way. However there are data points showing that a rebound is happening; take global PMI numbers for example. What is really interesting there is that the rebound is visible already, whereas it took perhaps a year for the same effect to take place during the global financial crisis. We witnessed in Q1 and Q2 one of the sharpest bear markets on paper followed by a deep recession and the good month-on-month or even quarter-on-quarter numbers that we are currently seeing are really saying that we are going from little activity, or even zero activity, to some level of activity. What is crucial is whether this shock rebound, which was very much a reaction to QE, to fiscal measures, gets converted into sustainable, steady growth and how long is needed for recovery to take us back to pre-Covid levels of economic activity.
What does this mean for your asset class?
This is a strong opportunity for liquid futures as an asset class. The asset class as a whole weathered the crisis reasonably well; it has not been affected too much by the dislocation we have seen elsewhere and it has remained fairly tradable, with good liquidity profiles all round. Liquid futures consist of a very wide range of instruments – it is a diversified asset class by nature environments like the current one, where uncertainty is decreasing and where a recovery seems underway, whether it is actually a sharp V or over a longer horizon, have historically tended to remain favourable to the emergence of steady, sustainable trends in the market. Any new market event, such as the one which happened in Q1 this year, ends up providing us with an additional data point to test the various investment theses. Maybe anecdotally it is crucial for us to actually be able to train models or to assess the investment thesis over long horizons. We need to be able to diagnose whether models behave in the way they are expected to; tail events like market crashes fortunately tend to be fairly rare in nature and to us something like what happened this year is also a significant data point, something which can be used for developing future models or enhancing existing ones.
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