Taal selectie

Pension funds

Next Generation

Pascal Blackburne, CIO 2020-06-01

Even as lockdown measures are progressively eased, all eyes remain focused on the Covid-19 public health crisis. Its economic impact is clearly huge, as are the various public support packages being deployed across the globe. But one should not forget that the economic and – especially – (geo)political situation was difficult already before the pandemic broke out. Brexit, US-China tensions, European Union cohesion: these issues, to name just a few, are still very much present.

The ECB expects European GDP to plunge 8 to 12% this year, according to words recently spoken by President Christine Lagarde. Such a degree of economic recession, indeed bordering on depression, has not been experienced since the 1930s. It thus comes as no surprise that the central bank’s coronavirus-induced asset purchases have averaged EUR 26 billion per week since the start of lockdowns, in late March – on top of its regular EUR 20 billion monthly interventions. At this pace, the ECB’s EUR 750 billion Pandemic Emergency Purchase Programme (PEPP) will be exhausted by October, prompting the ECB to announce a EUR 600 billion extension at its meeting on 4 June, even outpacing analysts’ expectations by EUR 100 billion. All told, full-year European money printing could reach a record EUR 1,600 billion, offsetting much (ca. 8%) of the expected GDP contraction – albeit at the risk of destabilising the financial system over the longer run.


Meanwhile, prompted by a Franco-German initiative, the European Commission is working on a EUR 750 billion rescue plan, which would also make history in that it – rather intelligently and elegantly – inaugurates some form of fiscal redistribution among member countries. The proposed scheme is the following: the European Commission will tap the bond market to finance a recovery fund (also known as “Next Generation EU”) and then redistribute this money to hard-hit industries and member countries. A debate remains as to whether this should be done via loans or non-repayable grants, although, truth be said, adding to Italy’s debt pile when it already stands at the level that caused Greece to fail makes no sense. Importantly, the money borrowed to set up the recovery fund will be paid back through the European Commission’s budget, meaning that all member countries will be put to contribution (alongside potential new taxation competencies that could be given to the Commission). The idea, of course, is that if the loans/grants are used well, member countries will have greater means down the road to finance the European Commission’s budget.

Will the burden really be shared by all across the continent? Doubts are legitimate, but that – again – is tomorrow’s problem. For now, if it wants to avoid break-up, the European Union has no choice but to help its southern members. Particularly since the path and timeline for Brexit have yet to be finalised and a hard version could well come to occur – adding to downward pressures on the European economy.

Across the Atlantic, US unemployment has spiralled to 20%, complicating President Trump’s re-election campaign – with the racial riots only serving to exacerbate the situation. What better to deflect attention from domestic issues that reigniting the trade conflict with China? To be fair, China’s recent moves in Hong-Kong do constitute a form of provocation. And, with the collapse in the oil price, the money that China spends on US oil this year (assuming it even reaches its agreed year-end import target of 500,000 barrels per day) will turn out to be far less than planned – giving cause for President Trump to show his teeth. For the global economic outlook, however, renewed US-China tensions are not good news.


Nor should they be for the US dollar, particularly since the Federal Reserve is even more profligate than the ECB, with a 2020 full-year money printing tally that could approach USD 4,000 billion. We would also point out that the greenback is looking expensive in purchasing parity terms and that its interest rate advantage versus the Euro has shrunk markedly.

As regards stock markets, our stance has not changed. In normal times, the current macroeconomic situation and valuation levels would give us little reason to invest. But these are not normal times. With interest rates set to remain in near- or sub-zero territory for the foreseeable future, we continue to prefer (asset-backed) equities over bonds – to the extent that the former offer the possibility of protecting purchasing power whilst the latter involve a foreseeable loss of capital. Still, recognising that volatility is here to stay and that indices are being driven by an extremely small group of IT companies, whose perceived “safe long-term growth” virtues have been reinforced by the confined/work-from-home environment of the past couple of months, we do suggest using hedging strategies to mitigate risk.

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