We are only beginning to see the full impact of the coronavirus on economic activity as governments ‘lock down’ significant portions of the economy to stop the virus’ spread. In the coming months the true scale of the shutdown on global economies will become apparent, and the question is for how long we will be in a recession. Against this backdrop, we see defensiveness and diversification as priorities over trying to time a bottom in asset prices.
Despite a late-quarter rally the S&P 500 fell 20% in Q1, its worst quarter since 2008, while the VIX hit all-time highs breaching the peak seen in the Global Financial Crisis. But it is difficult to compare the recent selloff with previous market events. The Global Financial Crisis was primarily a crisis of the financial sector which had knock-on effects for the economy as a whole. But this crisis is different, and the non-financial corporate sector is, for now, bearing the brunt of the impact of the economic shutdown required to help contain the spread of the virus.
Policy responses have been swift, and while it seems only economic ‘lock down’ can stem the spread of the virus, monetary and fiscal policy can help to ease conditions for companies struggling with cashflow issues as demand falls. Monetary policy is helping the funding markets and keeping debt-servicing costs low for the corporate sector, whilst helping to drive government borrowing costs lower. Fiscal measures have also been swiftly deployed, as governments the world over look to support their populaces and businesses in face of this unprecedented economic shutdown. But policy is not a panacea for the virus itself, and its spread and containment is ultimately setting the timeline of this crisis.
These policy responses will act as a tailwind when we emerge from this public health crisis, and unlike natural disasters like floods and earthquakes, capacity has not been affected and should be able to recover quickly once demand returns. We have seen tentative signs of this happening in China. But the virus’ spread continues with concerning signs in previously unaffected areas like India, and risks of a second wave in China that can’t be ignored. Given this environment, flexibility to allocate across regions and asset classes, as well as maintaining a focus on downside protection is of primary importance, and this remains our focus over trying to time the market hitting bottom.
Portfolio Manager, Multi Asset,