SG Market Risk Outlook – An About Face
In this edition of the SG Market Risk outlook we once again to help you navigate our key calls across the different asset classes. We provide both conviction levels (how probable we see our base-case scenario playing out) and quantified upside and downside scenarios across the principal asset classes, including equities, rates, credit, FX, emerging markets and commodities.
Conviction levels across all asset classes have declined to an average of 59% this quarter, down from 63% in April. Obviously, this means either upside or downside risks (or both) have increased. We estimate that there is more (risk-off) downside at 21% than (risk-on) upside at 20% on average. This compares to upside and downside risk at 20% and 17%, respectively, when we evaluated the risks last April. In the space of almost four months, analysts have less conviction in their base case outlooks and expect more downside risk (risk-off) than upside risk (risk-on).
Our economists indeed continue to see a likely recession, if only a mild one, in 2020. Accordingly, our equity strategists see further potential downside to global equity indices. Our analysts reiterate their view that the S&P 500 will very likely fall below current levels by 2Q20, pencilling in a 70% probability the index will fall to 2,600 points or below. For the EuroStoxx50, our strategists see a 75% probability the index will fall to 2,800 or below, from 3,480 currently. Our volatility strategists expect renewed bouts of higher volatility followed by periods of relative calm eventually leading to higher and higher volatility watermarks. In Europe, uncertainty about the UK’s withdrawal from the European Union will equally continue to fuel volatility on FX markets.
Our rates strategists see US 10y rates falling to 1.50% by 2Q20 (from 2.05% currently), and only see a 10% probability of rates staying at current levels or above. If lower rates are likely to benefit leveraged companies, weaker demand and falling profit margins should conversely result in higher default rates. We estimate US defaults will peak at 8.3% in 1H20, before receding back. As a result, our credit strategists expect IG credit spreads to widen over the coming quarters, even under a mild recession scenario.
For G10 FX, with Boris Johnson now in office, the risk of a no-deal Brexit has increased substantially. Our FX strategists, despite the Brexit debacle, have a 2Q20 GBP/USD forecast at 1.44 predicated on EUR/USD rising to 1.24 as the US economy slows and political headwinds ease in Europe.
For commodities, the turn of the global economic cycle inevitably casts a shadow on our price forecasts. We have lowered our oil price forecasts for 2Q20 to $61/bbl since our last report, as we now expect oil demand growth to weaken moderately. Still, geopolitical risks subsist, notably with respect to Iran, which has proven increasingly vocal about defying US policy in recent weeks.
About Societe Generale Cross-Asset Research
Societe Generale Cross-Asset Research is composed of more than 200 Analysts, Strategists, Economists and Quant, combining their expertise into ‘Research-based’ and innovative solutions suited to client’ needs: fundamental studies and expert views, investment ideas and long-term strategies, trade ideas and tactical baskets, thematic and systematic indices, quant solutions. On top of its established UK and Western European base, Societe Generale Cross-Asset Research benefits from a global coverage thanks to its presence in the US and in Asia (Hong Kong, Singapore, Tokyo and Bangalore) and Societe Generale local networks in Eastern Europe.
This editorial contains financial analysis which reflects the opinion of the Cross-Asset Research department of Societe Generale at the date of its publication. It does not necessarily reflect the views of the other departments of Societe Generale nor the official opinion of Societe Generale. This interview is dedicated to institutional and professional investors and is not deemed to be seen and used by retail investors for investment purpose. The viewers shall consult their own financial advisers to make their own appraisal.