The European Central Bank (ECB) has upped its Pandemic Emergency Purchase Program (PEPP) by €600 billion to €1.35 billion, extending its duration to June 2021 at least. Monthly net asset purchases will continue at €20 billion, plus €120 billion to the end of this year.

In Citi’s view, sentiment towards European assets is expected to improve.

The ECB is also supportive of the proposed EU27 Recovery Fund: The EU has announced a jointly financed fiscal stimulus package for the first time in history. The package, called “Next Generation EU,” may be predominantly funded via issuance of up to €750 billion in debt. The distribution of the grant portion could see Italy as the largest beneficiary.

The European Commission may issue debt across the yield curve, with repayments extended to 2058 to alleviate any medium-term funding pressures. While this proposal is significant in scale and size, it requires unanimous approval by all EU member states by 19 June 2020.

COVID-19’s economic impact is greater than previously expected for the short-term, followed by a sharper rebound than expected. The ECB has reduced its GDP growth forecast for 2020 by 9.5% to -8.7%, and raised its GDP growth forecast for 2021 by 3.9% to +5.2%. Citi’s GDP forecasts stand at -7.0% and 7.3% in 2020 and 2021 respectively.

Investment Strategy

Equities: While Citi analysts are underweight European equities, they are beginning to see opportunities. Healthcare and information technology could provide exposure to long-term unstoppable trends, while certain cyclical sectors like financials and industrials look increasingly attractive as industries begin to re-open.

Bonds: Citi analysts maintain preference for quality BBBs or better in Euro Investment Grade Fixed Income, and see selective opportunities in the High Yield (HY) space, despite a rising level of defaults. Rating agency S&P forecasts the Euro HY default rate to rise to over 8% this year from its current 2.7%.