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Be vigilant, be receptive to opportunities but most importantly be safe …

April 20, 2020

It is a difficult time to write an economic or investment thought piece.  Finance still matters, but it feels very insensitive to focus thoughts here when so many are being impacted, are being hurt, by Covid-19.  Our thoughts are firstly and firmly with the all those impacted by the Covid-19, as well our fantastic National Heath Service, without whom current circumstances would likely prove an even greater crisis than they currently are.

Here goes though.  It has been a while since I last posted some thoughts and a great deal has occurred since that post.  2019 ended as a good year for risk assets whilst 2020 started positively too.  This year’s equity market optimism began with the signing of the US / China trade deal and a prospective de-escalation of tensions.  This, was anticipated, to be beneficial to emerging markets, particularly those that would benefit from a weaker US Dollar.  Furthermore, the ECB was also signaling greater optimism over their own economic outlook and also believing that the phase one trade deal would lead to a reduction in overall market risk.  The US, UK and Europe all had low unemployment numbers and overall, new jobs were still being created, albeit at a slower pace.  GDP was positive albeit low, and central banks were by and large remaining accommodative.  On the flip side, the UK was concerning market participants as tensions between London and Brussels were expected to rise following a fundamental disagreement over how long Brexit discussions should take and what the future relationship between the UK and Europe ex UK could look like. 

Toward the latter end of January, attention was being diverted to Wuhan, China, specifically to concerns over the outbreak of the coronavirus virus.  During January, US and Euro government bonds returns 2.4% and 2.5% respectively whilst most equity markets were down, with the S&P 500 leading the way albeit positing a flat return.  Emerging markets were the hardest hit, falling nearly 5%. 

Equity markets initially continued to shrug off coronavirus concerns during February but once the virus started dominating the headlines, and the media focused on the severity of its impact initially in northern Italy, concerns grew exponentially as did volatility in risk assets.  Risk spiked as market proponents began to grasp the potential for the coronavirus virus to spread globally along with its severity.  Equity markets then sold off sharply with the S&P 500 and Europe ex UK ending the months 8% down whilst the FTSE ALL Share was down 9%.

Events then spiraled quickly in March as markets reacted severely.  Global stock markets whipsawed.  Both global equity and government bond markets selling off furiously and some suffered their worst falls since 2008.  By way of example, the Dow Index (DJIA) fell 10% on 12th March, and a further 13% on 16th March.  These two sizeable falls on the DJIA meant it had fallen by over 20% during the specified days and, by definition, was signaling a bear market.  Peak to trough the DJIA was down 37%.  In contrast, both the S&P 500 and FTSE 100 fell 34% peak to trough. Elsewhere, peak to trough the Italian stock market was down 42%, Nikkei 225 down 31% and WTI Crude Oil fell by two-thirds having reached $63 earlier in the year to now be trading at around $20 as a direct result of the coronavirus pandemic as Saudi Arabia found itself at odds with Russia and OPEC over what level of supply should be provided in direct response to the prospective reduction in demand.  Not every asset class has fallen though, Gold is actually up by 15% year to date and is now trading at levels not seen since the early part of the last decade. 

As March took hold, governments around the world implemented a variety of measures ranging from social distancing through to lockdowns, all leading to a significant reduction in global economic activity.  Governments rightly focusing on the preservation of life, aiding its people to pay their household bills, albeit at the expense of jobs, and productivity.  France, to their credit, implemented measures to limit bankruptcies, thus attempting to avoid a huge jump in the unemployment rate.  Generally, European markets have ‘furloughed’ whereby Governments have ‘promised’ to pay proportion of an employees wages.  This is in contrast to the US which has increased the scope of its pandemic insurance eligibility which does not preserve jobs, hence the huge spike in US unemployment.  (United States jobless claims jumped a further 5.2m last week.  The number of US claimants has surpassed 22m, a far cry from the 3.6% unemployment rate pre pandemic and a level that exceeds the highest level set in the 2007-2009 recession).  Generally the worlds central bankers, including the FED, BofE and ECB have implemented a raft of stimulus measures aimed at avoiding a financial crisis and curtailing a collapse in economic growth and prospective demand and supply shocks. 

Much of the above you will likely have read time and time again.  What is also known is that the bull market, which has been ongoing since the financial crisis 2007-2009, is over, abruptly ended in March 2020 and following the World Health Organisation declaring coronovirus as a global pandemic and following global governments measures to fight its spread.  Equity markets have been challenged, have corrected and recovered some of those losses.  Volatility has become and remains elevated.  Global markets are pricing a global recession.  What remains unknown is what the future holds, whether the current levels of global equity markets represent a buying opportunity and whether now is the right time to be buying. 

I do not believe that now is the time to be reducing equities further.  We have already witnessed a significant correction but I also believe that equity markets are currently significantly more attuned to risk.  That’s not to say we could not witness further short sharp downwards moves, because undoubtedly we will, particularly as volatility remains and will remain elevated.

The current measures will undoubtedly lead to a drag on economic activity but that should bottom at the time that governments begin to lift some of the lockdown measures, particularly those relating to staying and home or social distancing.  Post the relaxing of these, output must increase as employees gradually return to work, probably during May or latest June, and once the virus levels are deemed to be falling consistently, are at manageable levels and the risk from a second peak is not considered to be overwhelming to the respective health services.

Should we therefore be dialing up risk within portfolios?  Not yet, but I would strongly encourage you to start thinking about current asset allocation and how portfolios should be rebalanced.  Think liquid vs illiquid assets, large cap vs small cap, value vs growth and so on.  Some opportunities will involve shorter term thinking – ie buying cheap or distressed assets or longer term – private debt strategies, rotating from bonds to equities or switching out of developed markets into emerging markets.

Do not underestimate the potential impact the coronavirus is having and could continue to have particularly over the near term but crises are a fact of life and history tells us that market dislocations do offer opportunities for those that able to rebalance their portfolio to take advantage of both the shorter and longer term portfolio opportunities that have arisen.  Many things may have changed, but much will remain the same.  Be vigilant, be receptive to opportunities but most importantly be safe.

Michael Zacharia

Investment Director

This article has been prepared for information only.  Any opinions or views expressed are for information purposes only. The views expressed herein are generally those of Swiss Global which sets the long-term asset allocation models, along with both the strategic and tactical allocation.  Any material is provided for informational purposes only. It is important to note that the value of any investment and the income derived from it can go down as well as up. It may be affected by exchange rate variations and you may not get back the amount invested. Past performance is not necessarily a guide to future performance and individual taxation circumstances may vary. You should consult your tax adviser if in doubt. Any information provided does not constitute a recommendation and you should consult your adviser, consultant or financial representative for advice concerning your specific circumstances.  Any opinions expressed should not be relied upon and are subject to change without notice.  This material is for the sole use of the intended recipient and is for distribution only under such circumstances as may be permitted by applicable law.

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