By Philip Lawlor, managing director, Global Markets Research

As attention starts to shift towards when and how the lockdown exit will be implemented, there are a litany of important questions and themes that needs to be considered in a post-lockdown world. In this blog, we pose ten questions, which are top of mind for market participants.

1. From a macroeconomic perspective, the most fundamental question is what will be the long-term economic impact from Covid-19 on growth?

Looking at the long-term historical trend, the moving average of US nominal GDP and bond yields over a fifty-period shows that the US, like many other economies, have encountered four major economic regimes: In the 1970s, the US economy experienced a period of significant inflation; then followed a period of so-called Great Moderation under Paul Volcker, which stripped inflation out of the system; then encountered 10-year of Goldilocks under Alan Greenspan, with nominal GDP averaging...

By Robin Marshall, Director, Fixed Income Research

The coronavirus shock, and enforced shutdowns, come after a period of high corporate debt issuance, in response to very low interest rates. Credit quality has fallen in recent years, judged by the share of BBB-rated bonds currently making up over 40% of the FTSE USBIG Index, and the share of AA and AAA-rated bonds being near 25-year lows (see chart below).

Deep economic contractions look a perfect storm for “fallen angels” (bonds downgraded from investment-grade to sub-investment grade, or high yield by the credit-rating agencies).

Share of AAA, AA, A and BBB issues in FTSE USBIG Index

Source: FTSE Russell. Data as of April 13, 2020. Past performance is no guarantee to future results. Please see the end for important disclosures.

However, this is a unique end to a credit cycle, because it is largely driven by government-imposed shutdowns, so inferences drawn from previous cycles may...

By Philip Lawlor, managing director, Global Markets Research

UK factors seem to be dancing to the beat of a different drummer than those in other equity markets. Last year, while its global peers held to a strong defensive bias, the riskier Size (or smaller-cap) factor not only outstripped all other factors in the UK but everywhere else as well.

Similarly, amid this year’s brutal sell-off, the outperformance of defensive factors was far more muted in the UK than elsewhere, even as the UK Size rally evaporated. Quality lagged in the UK (bucking the global trend), while Low Volatility, followed by a modest rebound in Profitability, were the standout performers.

To illustrate these stark divergences, the chart below compares the relative returns of Quality and Size between the UK and the US.

Source: FTSE Russell. Data as of March 31, 2020. Past performance is no guarantee to future results. Please see the end for important disclosures.

By Robin Marshall, Director, Fixed Income Research

The coronavirus shock, and enforced shutdowns, come after a period of high corporate debt issuance, in response to very low interest rates. Credit quality has fallen in recent years, judged by the share of BBB-rated bonds currently making up over 40% of the FTSE USBIG Index, and the share of AA and AAA-rated bonds being near 25-year lows (see chart below).

Deep economic contractions look a perfect storm for “fallen angels” (bonds downgraded from investment-grade to sub-investment grade, or high yield by the credit-rating agencies).

Share of AAA, AA, A and BBB issues in FTSE USBIG Index

Source: FTSE Russell. Data as of April 13, 2020. Past performance is no guarantee to future results. Please see the end for important disclosures.

However, this is a unique end to a credit cycle, because it is largely driven by government-imposed shutdowns, so inferences drawn from previous cycles may...

By Philip Lawlor, managing director, Global Markets Research

The dramatic outperformance of defensive factors – namely Quality, Profitability and Low Volatility – over their more economically vulnerable Value and Size (or smaller cap) factors was the dominant global theme in the first quarter. This further widened the already large 12-month performance gap between the two camps.

Relative factor indicator performance (local currency, TR %) – Q1 2020

Source: FTSE Russell. Data as of March 31, 2020. Past performance is no guarantee to future results. Please see the end for important disclosures.

Delving deeper into the main drivers of the Q1 2020 factor performances, our research uncovered several prominent trends:

The growth and evolution of the REIT sector has given rise to an important new dimension of portfolio diversification. The REIT universe has expanded greatly beyond the property sectors institutional investors traditionally owned—Retail, Office, Residential and Industrial (RORI). Over the past decade, new property types have been introduced and have grown rapidly. Today, these property types outside of RORI account for half of total market capitalization. Of special interest are REITs that invest in real estate that supports the rapidly growing technology sectors of the global economy.

In this paper, we explore

By Philip Lawlor, managing director, Global Markets Research

The dramatic outperformance of defensive factors – namely Quality, Profitability and Low Volatility – over their more economically vulnerable Value and Size (or smaller cap) factors was the dominant global theme in the first quarter. This further widened the already large 12-month performance gap between the two camps.

Relative factor indicator performance (local currency, TR %) – Q1 2020

Source: FTSE Russell. Data as of March 31, 2020. Past performance is no guarantee to future results. Please see the end for important disclosures.

Delving deeper into the main drivers of the Q1 2020 factor performances, our research uncovered several prominent trends:

By Sergiy Leysk, director, research

Real estate investors are going through very challenging times. Several real estate owners have announced earlier this week that rent collections on the British high street in March had hovered around 30% of the amounts due. Not surprisingly, real estate REITs have underperformed global equities by some margin, as shown in the chart below.

Chart 1. Performance of FTSE Developed and FTSE Developed EPRA Nareit indexes, rebased, TR, USD

Source: FTSE Russell, data for the period February 18, 2020 to April 6, 2020. Past performance is no guarantee to future results. Please see the end for important disclosures.

The deterioration in British and global retail has been a theme for some time, even before the COVID-19 pandemic. The quarantine measures, which had to be introduced, have only served to aggravate the existing weak high-street business environment.

However, the current crisis is different from the...

US small-cap stocks as reflected by the Russell 2000® Index have experienced the bumpiest of what has been quite a bumpy ride for the US and global equity markets in 2020. After running a relatively flat +1.6% total return from the beginning of the year through February 19, the Index declined 40.3% from February 19 through March 23 and has now risen 12.3% from the March 23 recent low through April 6. And while the recent sharp ups and downs for the index in 2020 have occurred over a relatively short time period, they are consistent when viewed through a longer lens.

Source: FTSE Russell. Past performance is no guarantee of future results. Please see the end for important legal disclosures.

In this unpredictable environment, investment approaches that combine options with index-based strategies to provide a downside buffer while limiting upside have proven valuable to investors. These index-based strategies help capture the return potential of the...

By Robin Marshall, director, Fixed income

Several monetary and fiscal policies have been announced within the G20 to combat the coronavirus shock; (1) a return of zero, or near, zero interest-rate policy (ZIRP), (2) resumption of QE asset purchase programs, with more flexibility (i.e., US Fed, ECB notably); and (3) fiscal support for corporates and households on wage bills and tax holidays. Therefore, the ECB announced less demanding credit rules and no limit on the share of country bonds that it can buy (compared to the previous 33% limit).

The programs have followed the model in the global financial crisis (GFC), with pledges to do “whatever it takes“ to prevent deep recessions. Some policy-makers have argued for a more radical approach, by cancelling private sector debt, and using the state’s balance sheet to protect citizens and the economy from the coronavirus shock (notably ex- ECB President Draghi). But so far, policy-makers have relied on the GFC...

By Robin Marshall, director, fixed income.

Corporate credit spreads—led by energy—have increased sharply as the coronavirus shock developed, but the move should be seen against the underlying components of credit spreads. Spreads have also stabilized after central banks, led by the US Fed and ECB, stated they would buy corporate bonds as part of QE programs, as the chart below shows.

High yield and investment grade credit spreads - US, EURO

Source: FTSE Russell. Data as of March 31, 2020. Past performance is no guarantee to future results. Please see the end for important disclosures.

Movement in credit spreads alone may exaggerate the underlying levels of stress in the corporate sector, particularly in investment grade (IG). They may be boosted by the decline in government bond yields; this happened in Q1, when Treasury yields fell to record lows in early March, alongside the increase in corporate bond yields.

There was then a...

By Marlies van Boven, managing director, research & analytics

As markets were rattled by the coronavirus pandemic and investors risk aversion spiked, how did climate-focused strategies fare?  

To answer this question, we take a closer look at the FTSE All-World ex CW Climate Index. The objectives of this index are to exclude companies that produce controversial weapons; decrease the weight of constituents based on their exposure to fossil fuels or carbon emissions and increase the weight of constituents with green revenues[1].

We first review the long-term performance of the Index. As the chart below shows, between September 19, 2011 and April 5, 2020, the FTSE All-World ex CW Climate Index has outperformed the FTSE All-World by 3.7%. When we zoom in on the recent market sell-off we notice that the index has marginally outperformed the wider market during the recent period of extreme volatility. What where the drivers behind this performance?

By Robin Marshall, director, Fixed income

Several monetary and fiscal policies have been announced within the G20 to combat the coronavirus shock; (1) a return of zero, or near, zero interest-rate policy (ZIRP), (2) resumption of QE asset purchase programs, with more flexibility (i.e., US Fed, ECB notably); and (3) fiscal support for corporates and households on wage bills and tax holidays. Therefore, the ECB announced less demanding credit rules and no limit on the share of country bonds that it can buy (compared to the previous 33% limit).

The programs have followed the model in the global financial crisis (GFC), with pledges to do “whatever it takes“ to prevent deep recessions. Some policy-makers have argued for a more radical approach, by cancelling private sector debt, and using the state’s balance sheet to protect citizens and the economy from the coronavirus shock (notably ex- ECB President Draghi). But so far, policy-makers have relied on the GFC...

By Robin Marshall, director, fixed income

Government bond yields and yield curves proved highly volatile in March as the colossal and unique economic shock caused by the coronavirus unfolded globally. As seen in the chart below, yield curves steepened in most markets, with the largest moves seen in the US, as 10-year government bond yields backed up from early March, and short-dated government bond yields fell rapidly.

The 10s vs 2s yield curve was highly volatile in March as markets digested the huge policy stimulus unveiled by the G20

Source: FTSE Russell. Data as of March 31, 2020. Past performance is no guarantee to future results. Please see the end for important disclosures.

The long end of the yield curve was also very volatile as seen in the chart below. Twenty-year government bond yields backed-up after the huge policy stimulus was unveiled and markets assessed the implications. Concern about higher debt issuance, distressed selling...

By Philip Lawlor, managing director, Global Markets Research

With global equity benchmarks in bear-market territory, valuations haven’t been this low in years. But given the still-opaque outlook for world economies and earnings, the caveat of “let the buyer beware” remains an apt warning.

Based on 12-month forward EPS forecasts, PE multiples have fallen precipitously across developed markets, wiping out all or more of their gains since December 2018—and at, or approaching, multiyear lows. Notably, the Russell 1000 multiple (at 15.5×) remains well above those of its developed peers, particularly versus the UK, where it sits at 10.2×, in line with levels last seen in 2012.

Even so, forward PEs have yet to plumb the lows touched during the 2008-09 crash or the 2011-12 European sovereign debt crisis.

Regional 12-month-forward price/earnings ratios – round trip to multiyear lows

Source: FTSE Russell / Refinitiv. Data through March 31,...

By Philip Lawlor, managing director, Global Markets Research

With global equity benchmarks in bear-market territory, valuations haven’t been this low in years. But given the still-opaque outlook for world economies and earnings, the caveat of “let the buyer beware” remains an apt warning.

Based on 12-month forward EPS forecasts, PE multiples have fallen precipitously across developed markets, wiping out all or more of their gains since December 2018—and at, or approaching, multiyear lows. Notably, the Russell 1000 multiple (at 15.5×) remains well above those of its developed peers, particularly versus the UK, where it sits at 10.2×, in line with levels last seen in 2012.

Even so, forward PEs have yet to plumb the lows touched during the 2008-09 crash or the 2011-12 European sovereign debt crisis.

Regional 12-month-forward price/earnings ratios – round trip to multiyear lows

Source: FTSE Russell / Refinitiv. Data through March 31,...

By Philip Lawlor, managing director, Global Markets Research

What a difference a few months can make. Only last autumn, the FTSE 250 Index was standing out for significantly outperforming its larger counterpart, the FTSE 100 Index. However, this meant that the small-cap index only had further to fall since the coronavirus sell-off started in February.

Looking at the FTSE 250 performance in the last three months points to losses of -33.3% compared to -26.8% for the FTSE 100 Index, but on a 12-month basis, the brief relief rally in the last few days has now put its performance on a par with its larger peer. Why so?

FTSE 100 vs FTSE 250 (Rebased, TR)

Source: FTSE Russell / Refinitiv. Data as of April 1, 2020. Past performance is no guarantee to future results. Please see the end for important disclosures.

FTSE 100 versus FTSE 250 relative performance has been closely correlated to the swings in sterling

The large swings in...