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Manulife InvestChoice – Q2 Market Outlook

June 2020

Key Macro Themes 

Global economy can meaningfully bounce back

Every major economy in the world is going to experience sharp contraction in growth. The economic damage will likely occur within a compressed timeframe. Of note: We believe the coming recession will be services-led, as opposed to the typical investment- and manufacturing-led recession.


What matters most to markets isn’t the depth of the economic contraction in Q2, but the length of the expected weakness. In our view, the global economy can meaningfully bounce back from two to three months of severe weakness, but if it lasts longer than that, a prompt “return to normal” will seem even less likely.

Central bank action reduced likelihood of credit crisis

Aggressive central bank action has reduced the likelihood of a credit crisis, although the risk still remains and should be monitored closely. We don’t believe the U.S. Federal Reserve will pursue negative interest rates, but we also don’t expect interest rates to rise in the next few years.

Fiscal stimulus to support the recovery

Fiscal stimulus is significant, but it’ll mostly support the recovery, as opposed to being able to prevent the Q2 contraction from taking place. We believe the amount of global fiscal support announced so far will produce some mild but non-negligible inflation in the medium term and is likely to steepen the yield curve.

Sharp decline in oil prices creates additional disruptions in global economy

The recent sharp decline in oil prices is creating additional disruptions in the global economy and financial system. We believe this will be a more significant drag on growth and capital markets than consensus currently suggests. We believe a floor in oil prices is necessary for a sustained risk rally. 

Asia is likely to see its economic data rebound more quickly

Asia is likely to see its economic data rebound more quickly on a short-term basis. Meanwhile, we believe several developed markets with high levels of household debt such as Australia and Canada are at risk of experiencing significant deleveraging.

COVID-19 introduces structural changes to global economy

COVID-19 is likely to introduce structural changes to the global economy over the next several years, including further de-globalization, an emphasis on the digital economy, extremely low interest rates, and a move toward substantially larger government deficits.

Market Views

Equity: Franklin Technology

The spread of the coronavirus globally has caused market volatility and possibly economic downturn. But we believe this sharp downturn is temporary. With various sectors experiencing volatility, the technology sector has shown resilience during the crisis. Sector valuation has become more reasonable and many high-quality growth companies are at discount to fair value.  And the coronavirus has created opportunities as consumers and business learn new ways to shop, be entertained, work and receive healthcare. We see transformations of corporate operations and people’s daily livings with the modern technological advancements.  

We believe digital technology is necessary for enterprise to better understand and service their customers at a competitive cost, or else will risk being disrupted by digital natives. We remain focused on the highest-quality businesses aligned strongly with the Digital Transformation theme and its associated sub-themes: artificial intelligence (AI) and machine learning, cloud computing, data analytics, IoT (internet of things), cybersecurity, software as a service (SaaS), e-commerce, fintech and digital payments, digital advertising, customer insights, collaboration and workflow, DevOps (software development and IT operations), 5G network communications and more.

The key risks we are currently monitoring include a focus on aggregate demand amidst the fallout related to COVID-19. The shutdown of the world’s major economies has created significant demand, margin, free-cash-flow and balance sheet risks for nearly all companies. 

On the positive side, during this volatile period, there is strong demand for people to adopt technology due to social distancing policy and has created new technology trends and opportunities. There is a vast number of consumers and workers that are being retrained on these technologies and services, and we think that these areas of the economy are going to do well going forward as a result of the crisis.

Fixed Income: Schroder Global Credit Income

With numerous countries going into lockdown in response to the Covid-19 pandemic it has become clear the global economy is almost certainly heading for a deep recession. Central banks and governments have responded quickly with aggressive monetary and fiscal policy to help support individuals and companies through these challenging times. It will be a challenging road to recovery, but with signs of the virus receding and some markets starting to re-open, there are some signs of optimism in front of us.  Credit has responded negatively to the situation and has pushed spreads to historically cheap levels across investment grade, high yield, securitized and EM debt.  We believe the current environment presents an opportunity to extract an income from global credit.

Given the current economic situation, we should retain our overall defensive stance which includes a preference for investment grade and a focus on non-cyclical/defensive sectors.   We think it is important to remain very selective in choosing issuers and focus on healthcare, utilities, media, telecommunications and only selectively in cyclical sectors where the levels of yield are elevated. Additionally, we can remain open to opportunities in the high yield space, but will be very selective and focus on sectors such as healthcare, technology and telecommunications where cash flows remain quite attractive. Finally, we are starting to see some value in the investment grade hard currency EM space with a focus on higher quality issuers in Asia and selectively in markets within Latin America.

Market volatility remains high, default risk is likely to increase and downgrades are likely to accelerate in the near term. Therefore we believe adopting a global unconstrained strategy that can navigate the current market dynamics and aim to deliver income while mitigating drawdowns relative to the overall credit market.


Multi-asset: Blackrock Dynamic High Income

March ended as one of the most volatile months in history. The sharp drop across markets was consistent with a worsening fundamental outlook due to the coronavirus, but was also exacerbated by un-economic (or forced) sellers. A historic monetary and fiscal policy response has helped calm markets and should quicken the eventual recovery, yet until there is more visibility around the progression of the virus and the duration of economic shutdown, markets are likely to remain volatile. That said, we believe we may have seen the peak in volatility as the acute deleveraging/forced selling seems behind us which is also reflected in April’s recovery. From a growth perspective, it's clear the drastic measures taken to contain the virus will slow economic activity materially in the coming months. 

In terms of positioning, we have been patient in adding risk as we believe there is still much uncertainty around the economic backdrop coupled with the sharp rebound we have seen in recent weeks, our preference continues to be a more cautious stance in the short-run. That said, we still believe most markets in our opportunity set offer income plus some price appreciation potential on a medium to longer-term time horizon. Recent positioning changes have included a reduction to European stocks in favor of the US, a reduction in EM debt, a shift in duration exposure to further out on the curve and an increase in covered calls. Within covered calls, most of the recent additions have been skewed to more resilient names given the backdrop whereas historically we have generally favored more cyclical exposures.

Disclaimer - Key Macro Themes

Manulife Investment Management is the global wealth and asset management segment of Manulife Financial Corporation. The information and/or analysis contained in this material have been compiled or arrived at from sources believed to be reliable but Manulife Investment Management does not make any representation as to their accuracy, correctness, usefulness or completeness and does not accept liability for any loss arising from the use hereof or the information and/or analysis contained herein. Neither Manulife Investment Management or its affiliates, nor any of their directors, officers or employees shall assume any liability or responsibility for any direct or indirect loss or damage or any other consequence of any person acting or not acting in reliance on the information contained herein.

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Disclaimer and Important Notice - Market Views

The relevant information is prepared by relevant fund house(s) for information purposes only. The contents are based on information generally available to the public from sources reasonably believed to be reliable and are provided on an "as is" basis but have not been independently verified. Any projections and opinions expressed therein are expressed solely as general market commentary and do not constitute solicitation, recommendation, investment advice, or guaranteed return. Such projections and opinions are subject to change without notice and should not be construed as a recommendation of any investment product or market sector.

The opinions as expressed in the relevant articles do not represent those of Manulife Investment Management.

Manulife Investment Management does not make any representation as to their accuracy, correctness, usefulness or completeness and does not accept liability for any loss arising from the use hereof or the information and/or analysis contained herein.