A taboo lifts – The European Recovery Fund

Corrected input – In recent weeks, European Asset classes such as credit and high-quality cyclicals have experienced highly favorable conditions on the back of the expansion of the ECB’s bond-buying program, which now totals €1.35 trillion! This helps alleviate concerns about the fragmentation of the Euro area, and as a consequence, also spreads against the substantial decline in the benchmark Bund.

The final announcement of the final terms of a recovery fund may be made as early as the beginning of July. In essence, this arrangement is expected to lift the taboo surrounding fiscal transfers. We expect the concept and guidelines to be primarily German-directed, and therefore very robust; taken together with a clear monetary policy in response to the pandemic, we are now more upbeat on Euro area assets (currency, credit, and cyclical equities).

In addition to this program, several other initiatives are in the making: a €130 bn tax cut package, spending and support for businesses, a €50 bn “Green Marshall Plan” to overhaul and to reinvigorate the currently diminished “green-orientated” industrial activity. The general move towards more sustainable, less carbon-centric economic activities will lead to key developments in the area of hydrogen engines, which are touted to be the next generation of engines (to replace electric). Development in this field is very important is it lays the foundation for new paths forward in many areas, such as revitalizing and creating clean industrial activities (batteries cannot yet be recycled) and safeguarding local economic activity (about 40% of the global GDP is related to the larger automotive and consumer industries).

While the full assessment of the legacy of the pandemic is still in the works, the economic mood of entrepreneurs is becoming more positive! In turn, this lightening mood is supportive of longer-term market development. The rapid turn-around was much anticipated by the market participants which have a medium to long-term approach to their investment decisions.