Yesterday, the S&P 500 closed at 3232.39 which puts the index +0.05% YTD, a remarkable recovery from the March low of 2237.4. However, this recovery in equity markets sits somewhat awkwardly with a global economic recovery that looks precarious. Indeed, the World Bank’s latest Global Economic Prospects report, released yesterday, was described by Ceyla Pazarbasioglu, World Bank Group Vice President for Equitable Growth, Finance and Institutions as a “deeply sobering outlook, with the crisis likely to leave long-lasting scars and pose major global challenges”.
The World Bank’s latest Global Economic Prospects report forecasts that global growth will contract 5.2% in 2020. It looks for advanced economies to contract by 7% and for emerging markets and developing economies (EMDEs) to contract by 2.5% in 2020. This assumes that restrictions start to be lifted from mid-year allowing a recovery: in 2021 they forecast the global economy will recover by 4.2% reflecting a 3.9% rebound in advanced economies and a recovery of 4.6% in EMDEs. However, the World Bank note: “the outlook is highly uncertain and downside risks are predominant, including the possibility of a more protracted pandemic, financial upheaval, and retreat from global trade and supply linkages. A downside scenario could lead the global economy to shrink by as much as 8% this year, followed by a sluggish recovery in 2021 of just over 1%, with output in EMDEs contracting by almost 5% this year.”
While markets continue to respond to the monetary and fiscal policy responses around the world and credit markets are recovering well, we caution that a high degree of uncertainty regarding the outlook remains and we favour portfolios with a bias to a still high quality weighted average rating. Aside from Pemex (rated BBB/Ba2/BB- By S&P/Moody’s/Fitch), for us on a risk-reward basis, BBBs are generally not trading at sufficiently wide spreads to warrant aggressively adding to weightings at current levels. We still see a lot of opportunity in credit markets, particularly in areas such as the quasi-sovereign space. To illustrate, Abu Dhabi Crude Oil Pipeline 4.6% 2047, rated AA by both S&P and Fitch, trades at a yield of ~3.5% and is over 4 credit notches cheap on our models.