The resurgence of Covid-19 cases in three northern Chinese cities prompted the government to escalate pandemic containment measures aggressively, just ahead of the Lunar New Year (LNY), leading to a plummet in travel during the holiday season.

Predicting the growth and bursting of bubbles is a difficult task, even considered as impossible by some. In fact, bubbles can last for a long time and are only apparent when they burst. Calling them too early can lead to suboptimal allocation. However, there are signs of market exuberance, particularly in the tech sector. These high valuations are driven by high growth expectations and, more importantly, ultra-low discount rates, the normalisation of which could trigger a bursting of the bubble. Although a major source of risk for investors, history shows that all bubbles are not equal when it comes to their impact on the economy.

While the spectacular Covid shock may easily lead to exaggerate extrapolations, it cannot be ruled out that it will matter for long-term productivity and growth. However, the effects could work both ways. Reasons why the current crisis could further worsen “secular stagnation” are many, yet there are also a channels through which it could work positively.

Given the context, Q4 2020 corporate earnings proved resilient. The regions least impacted by the pandemic, such as EM (+25%) and Japan (+20%), experienced notable increases. In the rest of the world, where the pandemic was more virulent, the US still managed to post a positive gain (+4%) while Europe was more affected (-20%). However, even in the most affected regions, the results were far better than expected, with the most significant progress coming from cyclical sectors.

The move in rates is just one factor of the macro backdrop that can drive spread trends, but one that worked quite well in past cycles and therefore worth focusing on in the current recovery phase. Actually, this credit cycle was cut much shorter by unprecedented intervention from central banks and from huge fiscal support, ultimately leading to relevant differences with past experiences, outlined in this piece. Our conclusions are that these differences are probably going to soften the traditional historical relationship.

We expect business fundamentals to improve in the coming months, especially for low-rated companies. The ratings momentum in HY, as measured by downgrade/upgrade volumes, has already turned positive.

After decades of sound performance, doubts have been cast on the ability of the equity value strategy to keep delivering in the aftermath of the 2008 Global Financial Crisis. 

Private debt markets have grown rapidly since the Great Financial Crisis (GFC), with global assets under management (AuM) tripling, from $275bn in 2009 to over $850bn in 2019. The European market accounts for about a third of these assets.