Market CompassMarch 2020

A team of 13 analysts based in Paris, Cologne, Trieste, Milan and Prague runs qualitative and quantitative analysis on macroeconomic and financial issues.

The team translates macro and quant views into in-vestment ideas that feed into the investment process.

MARKET OUTLOOK

USFed cut rates by 50 bps, but markets remained nervous

Coronavirus will dent quickly business sentiment and harm supply chains...

...although labor market remains resilient and consumption strong

Biden’s lead in the primaries may reduce political uncertainty

Covid-19 fallout to dampen activity now that contagion spreads also outside ItalyChances for fiscal action roseECB likely to act soon providing extra liquidity to banks

Number of new Covid-19 cases is decreasing

Manufacturing PMI dropped significantly

Additional major fiscal package expected

Covid-19 pushed inflation further up

Bank of Japan (BoJ) stepped up assets purchasing and supporting liquidity

PMI slumped to 8-year low

Covid-19 likely to delay recovery from the Q4 2019 GDP drop

EUROZONE JAPAN

• Due to the global spreading of the Covid-19, fears for economic activityincrease.

• The data released this month will provide a first assessment of thedamages. The Fed has already cut rate and Central banks will follow alsoproviding liquidity support. Fiscal measures look forthcoming.

• Markets are discounting a lot of bad news and might be prone for arebound once global infections start to recede. But a global pandemicscan no longer be ruled out.

• Given the high uncertainty about further contagion and the economicfallout, we scale back the already cautious pro-risk bias in our portfolios,reducing our tactical equity exposure to neutral.

Edited by

MACRO & MARKETRESEARCH TEAM

www.generali-investments.com

CHINA

UK

WORLD

Coronavirus is spreading globally...

…threatening global supply chains

The sharp drop in oil prices provides only a modest cushion

Likelihood of coordinated policy action increase

UK-EU trade negotiation started amid big tensions

Bank of England (BoE) expected to cut rates

Coronavirus spreads more widely, with a more disruptive impact on the global economy

Political uncertainty (in the US and globally) prevents a stronger rebound in manufacturing and investment in H2

Weak profitability caps investment and then employment growth in the US and Euro area

www.generali-investments.com

DIRECTION OF TRAVEL

• Equity exposure from slightly overweight to neutral

• Reduce the underweight in Core Government Bonds,preferring US Treasuries

• Reduce the overweight in credit, preferring non-financialInvestment Grade (IG) and being very cautious in High Yield(HY)

• Reduce further the underweight in cash to broadly neutral

Equi

ties

Bond

s

• Volatility will stay elevated short term at least till ex-China contagion reaches the peak.

• Coronavirus’ fears makes us cautious in the short term.

• We remain constructive mid-term expecting positivetotal returns < 5%, even with slightly negative 2020earnings growth.

• Despite having already priced further Central banksaction and strong drop in yields, no end of the downtrend in bond yields yet as Covid-19 keeps a grip on markets.

• Once the news flow turns more reassuring, yields mayrebound.

• Resilient spreads and ECB support favor European non-financial IG.

• With Covid-19 uncertainties high and the full economicimpact yet to show up, the dollar peak is delayed intolater in H1.

• In the short-term a strong USD vs EUR is likely, but oncethe virus drag fades we see a rebalance to 1.15.

• We see a recovery of the undervalued JPY over thecourse of the year.

Risk Min. Risk Max.

Curr

enci

es

Cash

Equities

Euro Area

US

Gov. Euro Area (core)

Gov. Euro Area (peripheral)

Euro Investment Grade

Euro vs. USD

UK

China

Dura

tion

Sovereign

Gov. US

JPY vs. USD

Euro High Yield

TOPICS TO WATCH!

Duration

Tensions in the Middle East threaten oil supplies

• Medium-term short, but too early to position now.

Japan

Credit

Emerging Markets

This document is based on information and opinions which Generali Insurance Asset Management S.p.A. Società di gestione del risparmio considers as reliable. However, no representation or warranty, expressed or implied, is made that such information or opinions are accurate or complete. Generali Investments Partners S.p.A. Società di gestione del risparmio, distributor of this document, periodically updating the contents of this document, relieves itself from any responsibilityconcerning mistakes or omissions and shall not be considered responsible in case of possible changes or losses related to the improper use of the informationherein provided. Opinions expressed in this document represent only the judgment of Generali Insurance Asset Management S.p.A. Società di gestione delrisparmio and may be subject to any change without notification. They do not constitute an evaluation of any strategy or any investment in financial instruments. This document does not constitute an offer, solicitation or recommendation to buy or to sell financial instruments. Generali Investments Partners S.p.A. Societàdi gestione del risparmio and Generali Insurance Asset Management S.p.A. Società di gestione del risparmio are not liable for any investment decision based onthis document. Generali Investments may have taken, and may in the future take, investment decisions for the portfolios it manages which are contrary to theviews expressed herein. Any reproduction, total or partial, of this document is prohibited without prior consent of Generali Investments Partners S.p.A. Societàdi gestione del risparmio. Generali Investments is part of the Generali Group which was established in 1831 in Trieste as Assicurazioni Generali Austro-Italiche.Generali Investments is a commercial brand of Generali Investments Partners S.p.A. Società di gestione del risparmio, Generali Insurance Asset ManagementS.p.A. Società di gestione del risparmio, Generali Investments Luxembourg S.A. and Generali Investments Holding S.p.A.

www.generali-investments.com

SPECIAL FOCUS

UNCERTAINTY ON THE CORONAVIRUS URGES A RISK OFF IN THE PORTFOLIOS

The Covid-19 virus is turning from a regional health crisis to a global issue; uncertainties about the global economic impact have been rising sharply. Equity markets have eventually sold off in late February, catching up with the safe-haven rally in core bonds seen earlier. Financial markets already discount a lot of bad news as of March the 3rd, global stocks are down by 9% and 10y UST yields have fallen to around 1% since mid-January. The peak in the number of new infections in mainland China already seems to be behind us, but business in China remains disrupted. We have cut our forecast for Chinese growth in 2020 from 5.9% to 5.4%, but risks are tilted to the downside. In Europe, Northern Italy has been hit particularly hard; the disruptions seem set to trigger a recession in the country. Short-lived disruptions from epidemics tend to be recovered quickly - at least in manufacturing (less so in services).

THE IMPACT IN MANUFACTURING VS. SERVICES

Disruptions from epidemics tend to affect differently the manufacturing sector compared to the services’ one. Productions delays in manufacturing tend to recover in a four-months period, whereas the losses incurred in the service sector, e.g. tourism, is unlikely to be recovered at all.

For example, a mobile phone (product) whose production is stopped in February can be shipped and sold in October whereas if a vacation (service) is cancelled, it’s unlikely to be rescheduled within the same year and the loss will be permanent.

Looking at the Italian GDP, bearing in mind that the tourism sector accounts for 5%, the impact should not be underestimated.

GLOSSARY

Source: Datastream, 3 March 2020

The more Covid-19 resembles a global pandemics, the higher is the risk of a deeper and more protracted shock to consumer and business confidence. Fiscal and monetary policy will step in: the surprise 50 bps cut by the Fed will be followed by further monetary and fiscal stimulus globally. For the coming weeks, we markedly cut back our moderate pro-risk tilt in our portfolios. We completely unwind our overweight (OW) exposure in Equities to neutral, reduce further our moderate OW in Credit and significantly underweight in Core Bonds. Yet high-rated non-financial euro Credit continues to enjoy the substantial backing from the European Central Bank’s QE program. IG spreads have also proven robust over the past weeks, and we still see value in IG in a bond universe dominated by negative yields. By contrast, we are cautious on HY near term as the crisis will exert market pressure on highly leveraged companies.

Coronavirus impact on financial marketsNumber of cases

1

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

1,9

2

90

92

94

96

98

100

102

104

106

108

110

Jan. 1 Jan. 15 Jan. 29 Feb. 12 Feb. 26

MSCI World (1 Jan. =100)Gold price (1 Jan. =100)Yield on 10 Year US Treasury (rhs)

MSCI

Wor

ld an

d Gold

price

(1 Ja

n. =

100)

10-Y

ears

US

Trea

sury

(%)