As lockdown easing pushes markets higher, hedge funds gauge the ‘new normal’

As global economies re-emerge from the coronavirus lockdown, Hedgeweek rounds up a range of views from across the hedge fund spectrum on how the so-called ‘new normal’ may shape investment opportunities…

As global economies re-emerge from the coronavirus lockdown, Hedgeweek rounds up a range of views from across the hedge fund spectrum on how the so-called ‘new normal’ may shape investment opportunities…

Global stock markets are continuing to rally – the S&P500 added 3 per cent this week, while European markets gained almost 6 per cent, with emerging economies also rising – and oil markets are trending upwards.

Analysts at Man Group, the London-based publicly-traded global hedge fund giant, acknowledged the lockdown easing is “triggering a rush of positive sentiment” across geographies.

But they cautioned that: “it remains to be seen what kind of economy will emerge from the bunkers.”

Recent data surrounding new coronavirus infection rates is limited, and easing lockdown restrictions may not necessarily change behavioural patterns, Man analysts noted in their ‘View From The Floor’ note.

“Many people will have remained furloughed and may not have returned to the level of social interaction they engaged in before coronavirus,” they added.

BlueBay Asset Management’s Anthony Kettle, senior portfolio manager, emerging markets, believes the lockdown-easing appears to be proving a success so far – but warned that hard economic data now emerging reveals the extent of the economic damage caused by the pandemic.

“Markets are taking a leap of faith in looking through the current malaise,” Kettle said in a note on Thursday.

Higher oil prices and a steeper US Treasury curve favour bullish emerging market sentiment, he added, with foreign exchange markets – “the highest-beta element of EM” – outperforming in recent weeks.

Alberto Gallo, Algebris Investments’ head of macro strategies, said the Covid-19 crisis has brought about a clash between the “old economy” – oil, retail, commercial real estate, and autos – and the new, with the latter, exemplified by technology and telecoms sectors, emerging as clear winners.

Credit assets now offer a better risk-return than equity, particularly in the US, said Gallo, who manages the Algebris Macro Credit Fund.

But he noted the “obvious winners” from the recent turbulence such as technology or telecoms names are now expensive. Instead, opportunities lie in more cyclical sectors which can survive thanks to strong management, competitive position and continued public support.

In a wide-ranging perspective, Niels Clemen Jensen, Absolute Return Partners’ founder and CIO, suggested fear may prove the biggest issue on the horizon as global economies unlock.

He pointed to data in China, the initial epicentre of the Covid-19 outbreak, which shows that three months after reopening, Chinese manufacturing has largely recovered – but the service sector is “nowhere near” back to normal.

Describing the enduring “scar tissue” of fear in the population left by the pandemic, Jensen said: “Many will be afraid to visit restaurants or hotels any time soon, and the appetite for sitting on a stranger’s lap in a packed Airbus 320 will also be limited.”