Nick’s comments build on what he had to say on a call last Wednesday, March 18. Highlights of that call follow. To listen to the March 18 call, go to www.calamos.com/CIOglobal
March 26 Update
The global fiscal and monetary policy response should be sufficient to avoid a global depression, creating opportunities in many areas of the markets.
The U.S. should be able to pick up again and recover quite quickly, with the economy on a much better footing by the second half of the year.
The combination of Fed policy extending loans to smaller businesses and fiscal policy that includes loan forgiveness for these loans will put the U.S. on a strong footing once we are on the other side of the health crisis.
The Global Equity Team is beginning to re-risk the portfolios, adding names that can participate in the recovery.
There may be a re-testing of lows in the bottoming process, but the team believes that names that lead the way in 2H 2020 have probably already reached their lows. The companies that reach their lows again will be a different subset of the market.
One of the most exciting places for the rest of 2020 and into 2021 is Asia, where we see significant growth prospects.
China is likely to move forward with stimulus in April. Stimulus is likely to be focused on programs that better the quality of life in China, along with technology investments and initiatives that China sees as core to their long-term geopolitical strategy. This will favor direct exposure to Asia—homegrown heroes.
The team is re-allocating to cyclical growth names, including in technology, industrials and financials; exposure to defensive growth is being reduced.
The team attributes the performance of the portfolios during this downturn to a variety of factors: top-down framework, active management, focus on quality attributes as part of a rigorous bottom-up process, comprehensive capital research and where applicable, the use of convertibles.
Amid the deluge of information, the team is processing data in a very mechanical way to make key decisions about managing risks in the portfolios, how to allocate capital and when to re-risk.
For the market to bottom, investors need to understand the depth of the recession (how bad it’s going to get from an economic perspective) and the timeline for recovery (how long should we expect the downturn to last).
In regard to the silver bullet of a vaccine for Covid-19, the Calamos Global Equity Team believes that is at least a year away. However, from a day-to-day perspective, what’s more important is the progress on mitigation (which determines the timeline of the crisis) and the fiscal/monetary side (which determines how painful it gets in the global economy).
Markets seem encouraged by the changed tone from the White House. The administration’s comments about getting back to work by Easter may be too optimistic, but setting the timeline in weeks or months rather than quarters is very significant. We are holding out more caution on the timeline for a return to more normal work conditions and believe sometime in May is a more likely scenario. That said, even if Easter marks the start of some reactivation of the economy, that news would be well received by the markets.
“Names that lead the way in 2H 2020 have probably already reached their lows. The companies that reach their lows again will be a different subset of the market.”
In terms of progress in treatment and the number of cases, the data points we are seeing coming out of Asia are positive, in terms of number of new cases of Covid-19 and reactivation of economies. The situation in Europe is more fluid, data is spotty in Italy and numbers across the region will fluctuate with the increase in testing. Even so, it seems like mitigation is working. Data coming out of Washington in the U.S. is showing signs of flattening. We’re also following reports of using malaria drugs to treat cases.
Also, there’s data that suggests there’s a much lower incidence of Covid-19 in latitudes where temperatures are warmer and more humid. If this is the case, this would be another positive, as this area includes major cities and economic hubs, including Tokyo and Singapore.
Even more important is the Fed and the fiscal response we are seeing. Monday’s announcement that the Fed would begin lending directly to small and medium sized businesses is very significant, especially when coupled with the fiscal response that includes loan forgiveness. Essentially, this translates into helicopter money that’s being dropped down to smaller businesses to keep them alive, vibrant and employing people.
This monetary and fiscal response helps put a floor under some of the economic declines we expect. We do not believe things are setting up for a worst-case scenario, with a significant uptick in bankruptcies, sustained unemployment and job dislocations.
Markets typically don’t bottom overnight, more likely it’s going to be a bottoming process with retesting of levels over the next few weeks.
The Calamos Global Equity Team believes we will look back on this period as one of real opportunity.
Aggressive fiscal stimulus isn’t just happening in the U.S., but also in Europe, Japan and Asia. There’s about two trillion dollars in overseas stimulus, and that doesn’t yet include China.
China is likely to host its National People’s Conference in mid-April, having delayed it due to Covid-19.
In the days leading up to the conference, the team expects regions to announce stimulus packages and projects. Coming out of the event, he expects significant announcements of different stimulus and investments that China will be making.
Asia has been less impacted by Covid-19 thus far, supported by countries like Japan and South Korea who were very proactive in mitigation issues, and China, where there was a significant shutdown.
The stimulus coming out of China is likely to be different than in 2009, when China announced massive infrastructure and housing stimulus programs that really helped reflation themes globally.
Previously, multinationals and companies that sell into Asia were well represented among the beneficiaries of stimulus. This time, stimulus in China is likely to focus on homegrown technology and 5G implementation, health care systems, food quality, and environmental quality.
There is considerable opportunity in cyclical growth. The Calamos Global Team is taking down exposure in defensive growth names and reallocating to cyclical growth, in areas including cyclical technology (like semiconductors), cyclical industrials and some financials that have been beaten up.
For the more than the last decade, secular growth has performed well given a mixed growth outlook, positive monetary policy tailwinds, and the big moats some businesses have built. We still think there are good companies and a good place for them in the portfolios. Long-lasting secular tailwinds can help companies grow above market and outperform—which is more important than ever.
Key secular themes include:
The team expects a changing narrative in health care, with heroes emerging from the sector. The private sector is working well with the public sector in terms of vaccine, treatment and testing development. The Calamos team is not trying to pick the company that will come up with the miracle drug and is instead focusing on companies that are providing the picks and shovels, and the necessary technology that goes into developing health care innovation. This has led to additions in bioprocessing in the portfolios.
China’s AI strategy and global technology in general. China is making big investments in artificial intelligence and the team believes the best opportunities to participate are through direct investments in Asian tech companies. Overseas companies may not be able to access these opportunities in the way homegrown companies can.
As an example of the expanded use of technology and AI to combat the coronavirus, more news has come out of South Korea. Coming out of the MERS crisis, South Korea passed different rules that gave the government the ability to quickly act and use technology. The country has used its telecom network and GPS software in phones to message, track and communicate with individuals who have fallen ill or are quarantined.
The U.S. may not adopt such far reaching practices due to privacy concerns, but the team notes that we could see more use of AI and technology in the U.S. coming out of this current crisis.
Global payments. This market is rapidly evolving in its ability to enable commerce. With more spending likely to happen online even after the current health crisis, the team expects an acceleration in the expansion of the global payments ecosystem.
Relative Resilience During Recent Drawdown
The Calamos global and international products have sought to provide relative resilience during this recent drawdown, which the team attributes to a variety of factors:
The Global Team uses comprehensive capital structure research—for example, looking at equities, convertibles and fixed income. For every company, the team looks at balance sheets, competitive position, and credit profiles. The process focuses on deciding if a company is a great business and what part of the capital structure represents the best opportunity.
Top-down analysis of macro trends, themes and markets is a tool for de-risking the portfolios. A broad view of the markets provides a way to identify problems percolating up. A lot of the stress in the markets today started in the fixed income market. The team has been factoring this into their view of opportunities for quite a while.
Calamos Evolving World Growth Fund (primarily an emerging market equity product). Positioned to provide risk-managed emerging market participation. The fund pursues as much bull market participation as possible, with a focus on quality growth companies and active allocation across markets. During the market rally from December 2018 through January 2019, the fund outperformed on the upside. The fund also seeks to hold up better during drawdowns, through a focus on quality companies and the use of convertibles to provide positive skew.
Calamos Global Growth and Income Fund (global product using equities and convertible securities). This fund takes a risk-managed approach to global equity opportunity, with the team seeking positive skew by combining convertible securities and equities, with active allocation.
Global markets have not yet reached a bottom, but Nick Niziolek believes the global economy and markets could be in recovery mode by the second half of the year, with China and other overseas markets making strong contributions. The Calamos international portfolios remain focused on preserving capital during these volatile markets, while also being positioned ahead of positive inflection points.
The trajectory of the coronavirus outbreak will be different in the U.S. versus what’s been seen in Asia, with cultural differences and technological factors helping containment efforts in Asia.
Vaccine progress, mitigation progress, and the global fiscal/monetary response are three key factors that will alleviate market uncertainty; the team is viewing economic data through this tri-fold lens to determine when to begin significantly re-risking portfolios.
“The names that are working the best are primarily in China and Asia, with many focused on online shopping/medical/education and software…there are likely to be more cyclical growth opportunities in China, as fiscal stimulus ramps up.”
Based on what has occurred in China and Italy, a peak in new cases—a deceleration in growth rates—will be crucial in helping the market find its bottom. We expect markets will begin to recover before the war against the coronavirus is won—investors will be encouraged once they see the U.S. is committed to defeating the virus.
The global economy and markets may well be in recovery mode by year-end, with strength in overseas companies and cyclical growth.
The Calamos global and international portfolios were well served by aggressive de-risking as the coronavirus outbreak began.
Portfolios include names benefiting from e-commerce, e-learning and e-medical tailwinds.
Data is likely to get worse from here and the team is cautious near-term, but at these levels there are opportunities to begin re-positioning for the anticipated recovery, including in cyclical growth.
Understanding the Economic Shock: Three Factors Provide Guideposts
Three factors will be decisive in defining the depth of the shock occurring in the U.S. and global economies, as well as the timeline for recovery.
A viable vaccine and a production schedule for broad implementation would be the golden ticket to give the market the certainty it wants. However, despite the positive developments announced, it is likely that a vaccine is at least several quarters out.
Mitigation progress—differences between countries will produce different outcomes.
The Calamos team is focused on the degree to which social distancing may be implemented, given the significant impacts to economic and market activity.
Many market participants are looking to Asia as an example of how the U.S. may respond to the coronavirus, but technology and cultural differences in Asia have put China, Japan and South Korea in a better position to mitigate the spread of the virus.
Referencing his extensive travel in Asia, Nick noted that in Hong Kong, it’s possible to travel from a hotel to an airplane seat without interacting with one human. Additionally, in many Asian countries, it is very common for people who are ill to wear masks to protect their peers.
China’s government may have employed strategies well beyond what the U.S. would be willing to—or capable of—executing. For example, there are indications that China utilized facial recognition software, heat-sensing cameras, and cell phone networks to identify and quarantine unhealthy individuals and their contacts. A combination of drones, physical enforcement, GPS monitoring, and camera surveillance ensured individuals remain quarantined.
South Korea continues to lead the world in testing. While testing can’t prevent the spread of the virus, it does allow for the effective quarantine of infected individuals.
Looking beyond Asia, there are also key differences between the U.S. and Italy, such as more elderly citizens and more smokers in Italy; this suggests that the outcome in the U.S. might not be as dire as what has occurred in Italy.
Fiscal and monetary response can catalyze recovery.
From a monetary policy perspective, the Fed finally fired its bazooka over the weekend and has followed with programs designed to improve liquidity.
Global central banks have also eased, although more likely needs to be done.
Europe has responded with significant stimulus packages. The prospect of a joint-debt offering, the first stage in a fiscal union—is especially encouraging, in Nick’s view.
The fiscal program coming out of the U.S. sounds significant, which could provide a floor and allay fears of a potential global depression.
Likening the battle against the coronavirus to war, Nick notes that markets will be encouraged by decisive action by the White House, even as the fight against the outbreak rages on.
Emerging Market Equities Are Benefiting from a Better Outlook for China
The recovery in China is real, asserts Nick. Official economic data coming out of China often warrants a degree of skepticism, but Nick and his team work to independently verify the picture painted by government-provided economic figures—for example, by analyzing traffic data, pollution data, and electricity consumption.
The team’s recent conversations with European company CEOs and CFOs who distribute and manufacture within China have also been encouraging; supply-shock risk is abating.
Historically, China has been hesitant to launch a full-scale stimulus program due to fears of stoking inflationary pressures. With inflation less of a concern, the team anticipates that China will implement large-scale stimulus programs once the government is confident supply is back on-line and the virus has been contained. These could differ from what was seen in 2009, and be more domestic in focus.
In the very near term, the names that are working the best are primarily in China and Asia, with many focused on online shopping/medical/education and software.
Looking further out, there are likely to be more cyclical growth opportunities in China, as fiscal stimulus ramps up.
The team expects a similar playbook in developed markets, assuming the monetary/fiscal/mitigation steps are as aggressive as they have been and are expected to be in China.
Nick’s team remains cautious on European banks. While central banks are likely to provide sufficient liquidity and the team doesn’t anticipate a crisis, they believe there are more attractive places to allocate capital.
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Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. The views and strategies described may not be suitable for all investors. References to specific companies, securities, asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to buy or sell. Investing in non-U.S. markets entails greater investment risk, and these risks are greater for emerging markets. The above commentary for informational and educational purposes only and shouldn’t be considered investment advice.
The principal risks of investing in the Calamos Evolving World Growth Fund include: equity securities risk consisting of market prices declining in general, growth stock risk consisting of potential increased volatility due to securities trading at higher multiples, foreign securities risk, emerging markets risk, convertible securities risk consisting of the potential for a decline in value during periods of rising interest rates and the risk of the borrower to miss payments, and portfolio selection risk. As a result of political or economic instability in foreign countries, there can be special risks associated with investing in foreign securities, including fluctuations in currency exchange rates, increased price volatility and difficulty obtaining information. In addition, emerging markets may present additional risk due to potential for greater economic and political instability in less developed countries.
The principal risks of investing in the Calamos Global Growth and Income Fund include: convertible securities risk consisting of the potential for a decline in value during periods of rising interest rates and the risk of the borrower to miss payments, synthetic convertible instruments risk consisting of fluctuations inconsistent with a convertible security and the risk of components expiring worthless, foreign securities risk, emerging markets risk, equity securities risk, growth stock risk, interest rate risk, credit risk, high yield risk, forward foreign currency contract risk, portfolio selection risk, and liquidity risk. As a result of political or economic instability in foreign countries, there can be special risks associated with investing in foreign securities, including fluctuations in currency exchange rates, increased price volatility and difficulty obtaining information. In addition, emerging markets may present additional risk due to potential for greater economic and political instability in less developed countries.
The principal risks of investing in the Calamos International Growth Fund include: equity securities risk consisting of market prices declining in general, growth stock risk consisting of potential increased volatility due to securities trading at higher multiples, foreign securities risk, emerging markets risk, small and mid-sized company risk and portfolio selection risk. As a result of political or economic instability in foreign countries, there can be special risks associated with investing in foreign securities, including fluctuations in currency exchange rates, increased price volatility and difficulty obtaining information. In addition, emerging markets may present additional risk due to potential for greater economic and political instability in less developed countries.
The principal risks of investing in the Calamos Global Equity Fund include: equity securities risk consisting of market prices declining in general, growth stock risk consisting of potential increased volatility due to securities trading at higher multiples, value stock risk, foreign securities risk, forward foreign currency contract risk, emerging markets risk, small and mid-sized company risk and portfolio selection risk. As a result of political or economic instability in foreign countries, there can be special risks associated with investing in foreign securities, including fluctuations in currency exchange rates, increased price volatility and difficulty obtaining information. In addition, emerging markets may present additional risk due to potential for greater economic and political instability in less developed countries.
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