Rolling Coronavirus updates - ECB 'like a doctor who has run out of medicine'

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InvestmentEurope is providing ongoing coverage of responses from the fund industry to developments linked to the spread of Coronavirus.

04/03 1515 UMT - Prospects for EM

Ian Beattie, Nedgroup Investments Global Emerging Markets fund manager, commented:

"We were relatively defensively positioned before the virus hit, because we thought that the policy easing in China was insufficient giving some of their banking problems last year. We thought the money numbers were not accelerating enough for the economic recovery in emerging markets and in the rest of the world to be as strong as the markets were expecting 

"Going forward, our hearts go out to those affected by the virus, but it could be a catalyst for further Chinese policy response which might be exactly what is needed. There will be economic disruption from the virus and the clampdown associated with it now, as the authorities admittedly rather belatedly act, but act forcefully. And we could see policy action meaning we'll get an acceleration in monetary supply in march or April time which would lead to economic recovery later In 2020, which will probably last into 2021. I don't want to preempt that, I want to wait till we see it, but you could see the pieces fall into place for a stronger recovery, but later, not right now"

Sectors which will be affected by the virus

"If they involve a lot of people, they're going to be negatively affected. So leisure, restaurants, the casinos - all of these will be significantly affected and closed for a long period of time. Factories which are employing a large number of people who have gone home for the Chinese new year may be unable to reopen, or certainly not able to reach the level of production people were expecting. So there will be lost production there. The market will probably be quite good at looking through that, as long as they can see when production will recover

"Computer games might see some increased use. Ecommerce as well - people not wanting to go to the shops and instead have their goods delivered to them. It's quite remarkable to see how this already strong sector is getting a further boost from this.

"It's remarkable how quickly people adapt. I've seen someone order food to be delivered, and on the bag of food there is a note with the body temperature of the chef, the server and the delivery driver so you know none of them are affected. So it's quite remarkable how quickly the market has got the hang of that.

"Ecommerce has been a big winner over the last couple of years, and I think those that are winning will continue to do well. There are some new names that are very interesting as well, and we are positioning and ready not just for ecommerce and hardware. Hardware has got further legs, as there's been a further de-Americanization of the supply chain. Companies like Huawei have shifted their supply chain away from American firms to Asian ones, and we've had some big wins there and it's got further to go."

Portfolio positioning

"We got a bit lucky selling the casinos before the virus really hit. But we did continue to get defensive once the virus did hit. But it's not the sort of crisis where we want to be selling our favourite names - we're looking for buying opportunities there, not opportunities to sell.

"We got more defensive, we bought the higher quality names, those we think will get fewer downgrades. Some of those stocks did very, very well so we took some profits in the big names.

"Timing is crucial here. Given what we're saying about the economy globally, we don't want to be cyclically exposed, we want to be in defensive companies where we're going to receive strong returns on capital."


04/03 1500 UMT - Themes to watch in bond markets

John Bellows, portfolio manager at Legg Mason affiliate Western Asset, commented:

"First, the speed and decisiveness of yesterday's Fed action reflect both the economic seriousness of the ongoing Coronavirus/Covid-19 situation, as well as the Fed's proactive stance when it comes to supporting the US economy. With regard to Covid-19, we believe it is now clear that there will be a significant impact on global economic activity. Most forecasters have lowered expectations for global growth to close to zero in 1Q20, and the outlook for 2Q20 remains quite unclear. We think it is straightforward that the Fed should respond to such a sizeable shock to economic activity. (While some observers may complain that monetary policy is ill-suited to respond to a "supply shock," it seems that there is an element of demand shock going on as well. The Fed rightly isn't waiting to find out which one is dominant.)

"With regard to the Fed's proactive approach, its messaging on this point has been clear for a while. As the Fed understands, the risks are elevated when growth, inflation and interest rates are all at low levels. In such an environment, we believe monetary policy should be proactive and aggressive in order to support growth and avoid levels moving even lower. Yesterday's actions are evidence that the Fed believes this argument and the FOMC is unanimous in supporting the actions that this argument demands.

"Second, the relationship between Fed actions and the market outlook may be weaker than normal in the very near term. The market's response to yesterday's Fed action was telling. The Fed's cut came earlier than most expected and at least met expectations in terms of sizing. What's more, nothing in Powell's comments could be considered disappointing or hawkish. To the contrary, Powell struck a dovish tone in terms of the risks to the outlook and he refrained from suggesting that yesterday's cuts would be immediately taken back should the threat of the virus subside. In short, yesterday the Fed met or even exceeded expectations, and any arguments to the contrary are difficult to credit. And yet, by the end of the day risk markets had moved lower, breakeven inflation moved lower and bond yields moved sharply lower across the curve. Needless to say, this is not the normal behaviour for markets in response to the Fed meeting or the Fed's actions exceeding expectations.

"The reason for the abnormal market response is that investors are struggling to assess the outlook for Covid-19, and the risks of either further spreading or further economic impact. As long as the Covid-19 risks remain front and centre, the relationship between Fed actions and market responses may remain difficult to predict.

"Third, and perhaps most importantly, while the Fed may not be the most important factor in determining near-term market moves, we do believe that the Fed is taking meaningful actions that will, over time, have a real impact on the economic outlook and therefore on markets. In particular, the Fed's proactive move to a more accommodative stance will support economic growth, and could even be decisive for the inflation outlook.

"The precise way in which this plays out depends crucially on the path of the Covid-19 impacts. Should the Covid-19 impacts prove deeper or more prolonged than currently anticipated, the Fed will likely continue to cut rates, perhaps as early as the March or April FOMC meeting (the market is already priced for another 50 bps of cuts through June). In that case, the Fed's lower rate policy will support sentiment and financial markets, not to mention real activity through increased liquidity and lower lending rates. On the other hand, should the Covid-19 impacts turn out to be more moderate, the Fed's rate cuts could leave monetary policy in an accommodative stance at the same time that a recovery from the Covid-19 slump is propelling growth to above-trend levels. Above-trend growth and easier monetary policy could in turn lead to a quicker recovery in inflation toward the Fed's 2% target. This would be an entirely new environment for markets, or at least an unfamiliar one for investors now accustomed to a steady drumbeat of ever-lower growth and inflation forecasts.

"A lot hinges on which of those two paths the Covid-19 impacts take. Yesterday's market moves suggest this will be the most important thing for markets in the near term. But, over the longer term, the real economic impacts of the Fed's actions will matter. And accordingly, markets are more and more likely to be influenced by a proactive and accommodative Fed, especially if that is eventually combined with an economic rebound."


Andrea Iannelli, investment director, Fixed Income, Fidelity International commented:

"The end of February saw the worst drawdowns in credit market since Q4 2018 and March has started on a similar, very volatile footing, as investors struggle with the impact that the Covid-19 will have on the global economy. Of course it is fair to assume that this period, whenever it eventually ends, will become known as the C-Virus crash.

"However, it is reasonable to argue that of course the virus was and remains the major driver, other contributing catalysts include US politics, overstretched valuations in credit and equity markets, and - as we may soon discover - large volumes of systematic volatility selling.

"The direction of travel for markets from here will depend on how the virus spreads and if the strong action that we have already seen by central banks and governments could provide some respite. In this regard, central banks are indeed seen coming back to the rescue yet again, with the Fed in particular that surprised markets and cut rates intermeeting by 50bp this week. This is the first time they cut in-between meetings since October 2008, a testament to the scale of the impact that is expected from the virus. Other central banks are expected to follow suit.

"Against this backdrop, we would caution against extreme bearishness at this point. On one hand, markets have already moved sharply to price in a high probability of recession and substantial policy action by central banks, with an additional 75bp of cuts priced in for the Fed alone by the end of the year. Moreover, there are simply too many unknowns to contend with, with the outcome that in most cases remains very binary."

Seven themes to have on the radar

 "We believe there are seven themes investors need to think about to help them judge whether this will be a short-lived episode or have longer-term effects. The first three suggest markets could recover sooner than expected:

  1. While this is a major scare that will prompt further demand and supply shocks, the world economy will recover, and could do so relatively quickly once things are back to normal.
  2. The sell-off has made some markets attractive, and the structural need for savings products in virtually every developed market remains in place.
  3. As yet, there is no funding shortage, with central banks providing unlimited liquidity and household and financial market funding rates from the banking system remain virtually unchanged.

"Four others suggest that we may yet be early in the correction process:

  1. Going into February, most asset allocators were likely long equities vs bonds or long risk in some way.
  2. Similarly, most (but not all) fixed income investors were very long risk at end-January.
  3. The unwinding or hedging of exposure to leveraged products caught up in the sell-off is still playing out. These moves can be significant and in themselves unobservable.
  4. Leverage is almost always inversely correlated to yield levels, and the amount of selling to unwind the positions outstanding is impossible to know before or during this period.

"None of the seven factors above include traditional market drivers such as central bank actions, fiscal policy responses, corporate default rates, GDP impacts or politics. In our view, so far, this market correction is a positioning unwind, not too dissimilar from the moves in early 2018 or those seen during the Italian political earthquake in the summer of 2018. This may change as the year progresses."

Investment implications

"Having started 2020 with little expectation of 2019 levels of return, we have reset our pricing for all global corporate bonds given how quickly valuations have shifted across Investment Grade, High Yield and Emerging Markets.

"Our portfolios were generally defensively positioned heading into the recent downturn as we viewed valuations as simply too euphoric and unattractive. It is worth highlighting that US Treasuries that have yet again proven to be the best "insurance policy" for investors as markets see the Fed as the only central bank in developed markets that has room to cut rates and support the economy.

"Given the scale of market moves over recent weeks, we will be looking to rotate back into areas where valuations are now more attractive, and where they may have moved out of line with fundamentals. We view the new issue market as the best avenue to add risk, as we think issuers will have to pay a premium to bring new deals to the market.

"As we look for opportunities in credit markets to exploit, we'll aim to do so in a prudent way in order to balance risk and return and protect portfolios against further bouts of volatility."


04/03 1445 UMT - Wave of panic

Sonal Desai, CIO Franklin Templeton Fixed Income, commented:

"An interest-rate cut can have only limited efficacy against the direct negative impact of the Coronavirus on economic activity, but its indirect impact via confidence and asset prices could be meaningful.

"However, in my view, the sharp correction in equity prices largely reflected the very high starting valuations, and I do not see an easy reversal. The Fed has indicated it remains in play—despite the limited efficacy of monetary policy in the current environment, I would expect to see some more policy moves if underlying data deteriorates.

"While markets have largely shrugged off the rate cut in early trading after the announcement, it should have a positive impact on sentiment. Furthermore, in the event that the spread of Covid-19 is contained, the economy will face substantially easier financial conditions."


Bastien Drut, senior strategist at CPR AM, commented:

"The Fed chairman Jerome Powell had already released an unexpected statement on Friday saying although "the fundamentals of the US economy remain strong, the Coronavirus poses a risk to economic activity." Then, the Fed took action and lowered its fed funds target range by 50 bps to 1.00 / 1.25%. This decision is historic for more than one reason:

  • This is the first rate cut of more than 25 bps since December 2008,
  • This is the first inter-meeting rate cut since October 7, 2008 (which had taken place 3 weeks after the Lehman Brothers collapse),
  • The decision has been taken unanimously (including hawks).

"At his improvised press conference, Jerome Powell reiterated that the fundamentals of the US economy remain strong but that the Coronavirus outbreak poses new risks that "will surely weigh" on economic activity. Perhaps the most striking sentence is: "The ultimate solution to this challenge will come from others, most notably health professionals." One of the possible interpretations is that the Fed is aware that during this election year, the support for the economy coming from fiscal policy will necessarily be limited and that it will be left alone to be able to do something.

"Nevertheless, there is some doubt about the effectiveness of such a decision and Jerome Powell himself suggested that this action would not have much impact: "We do recognize a rate cut will not reduce the rate of infection, it won't fix a broken supply chain. We get that".

"The Fed is not the only one to have eased its monetary policy since the Australian and Malaysian central banks also lowered their key rates:

  • Australian central bank (RBA) lowered its key rate by 25 bp to 0.50%. The statement is clear: "The Board took this decision to support the economy as it responds to the global coronavirus outbreak." For the RBA, global growth will be lower than expected in H1. "It is too early to tell how persistent the effects of the Coronavirus will be and at what point the global economy will return to an improving path." Australia, which has long been one of the developed countries with the highest official rates, is moving closer to the club of "zero rate" central banks.
  • The Malaysian central bank lowered its rates by 25 bp to 2.50%, justifying the movement by the fact that global economic conditions have deteriorated: "The ongoing Covid-19 outbreak has disrupted production and travel activity, especially within the region. Downside risks to the global growth outlook have increased, particularly in the near term."
  • The ECB itself did not announce any action today, but its chairman Christine Lagarde issued a statement yesterday explaining that "the coronavirus outbreak is a fast developing situation, which creates risks for the economic outlook" and that the ECB "stands ready to take appropriate and targeted measures, as necessary and commensurate with the underlying risks." This contrasts with her statements from last Wednesday in which she explained that the ECB was not at the stage to announce a new monetary policy response.
  • The great speed (the rush will say some) with which the central banks react to the coronavirus outbreak is surprising and is not necessarily reassuring. Interest rates have never been so low in developed countries and the downward trend is probably not over."


04/03 1430 UMT - Further responses to Fed cut

Shane Balkham, CIO at Beaufort Investment, commented:

"The Coronavirus outbreak, whilst unfortunately having already claimed numerous lives, has potential to be the pin to burst the economic expansion, or the pump to prime the next wave of stimulus.

"Policy makers around the world will look to grapple with the consequences of transport and supply chain disruptions resulting from efforts to contain the outbreak. Any response must be granular and specific, as the blunt tool of interest rate cuts may not be sufficient in this instance.

"The Federal Reserve remains the world's most influential central bank and its decision to slash rates by 0.5% yesterday was profound. At the beginning of the year, markets were pricing in just one US interest rate cut - make no mistake this is highly unusual action during a presidential election. But it can't contain the spread of the virus.

"Markets will continue to be volatile until coronavirus is brought under control. There are tentative signs that this is already happening, or at least that governments are responding more effectively. For investors, now is the time to hold your nerve and not be tempted into a knee-jerk reaction of selling your long-term investments in response to short-term market mayhem."


Nuveen's Global Investment Comitttee commented:

"The Federal Reserve surprised markets on Tuesday with a rate cut, moving the fed funds target rate range to between 1.00% and 1.25%. While the central bank maintained that "the fundamentals of the US economy remain strong," it also acknowledged that the coronavirus presents "evolving" risks to its outlook.

"So far there is little evidence in economic surveys or data that the U.S. economy is suffering as a result of the global spread of the Coronavirus and the production stoppages it has caused in China. But global manufacturing sentiment plummeted in February, and financial markets are anticipating that it will soon have a wider effect on the US and the world.

"While monetary policy can help ensure that markets function properly and liquidity remains ample, this tool is too blunt to be deployed effectively against the health crisis related to the coronavirus and its ripple effects into the broader economy. We have yet to see a credible policy response - in either the US or coordinated globally - to the specific types of shocks that could occur should the virus' impact widen from here. This is one reason we remain cautious about trying to time the bottom for equity or credit markets at this stage.

"Now that the Fed has opened the door to cutting rates to combat anticipated economic weakness from the coronavirus, we feel it may have little reason to stop anytime soon. Markets remain skittish about headline risk, and the negative U.S. economic data have not even begun to arrive. While we believe that a V-shaped pattern is likely for both the equity market and global economy this year - that is, a steep decline followed by a sharp trajectory upward - we have far less conviction that interest rates will rise significantly in any recovery given the Fed's increasing comfort with lower rates. This means that our views here about seeking diversification are going to be even more relevant for investors trying to generate income to meet their liabilities or spending needs".

Ongoing market volatility: Three themes for investors to consider

Theme 1: Be humble amid uncertainty

  • We are already seeing global economic and market effects from the coronavirus that will rival (if not exceed) the disruption from the U.S./China trade war. It's too early to accurately gauge the full effects.
  • The primary source of uncertainty in our outlook is whether the virus spreads widely enough to trigger a genuine demand shock in the U.S. and Europe, meaning a pause in consumer spending and business operations.
  • Our base case remains a steep dip in global growth in the first half of the year followed by a recovery starting in the third quarter, but we cannot be confident about a) the size of the dip and b) the timing of the recovery. So we caution our clients against trying to time tactical investments.
  • In other words, we think the recovery, when it comes, will be relatively quick and sharp. We don't advise trying to time an economic or market bottom.

Theme 2: Stick to your script

  • This is the flip side of our first theme: This is a not a time to panic or move to cash. Doing so defeats the purpose of long-term investment planning and strategies such as regular rebalancing and dollar-cost averaging.
  • None of Nuveen's GIC members expressed plans to shift to an even more defensive stance in their investment strategies, nor do we advise our clients to do so. We continue to advocate that investors rebalance as part of their routine portfolio maintenance, which at the moment may mean selling safe havens that have expanded to command a larger portion of a portfolio to buy riskier assets like equities. In other words, if an investor was already planning to invest in equities or other risk assets, we see no reason to deviate from that strategy.
  • About equities: Thanks to the coronavirus-inspired correction, stocks now look cheap compared to bonds - but only if you believe earnings growth won't fall sharply this year. Rather than search for the market bottom, our approach during this market turmoil has been to rebalance into "quality value" sectors like industrials and semi-conductors. We also believe that companies with stable growth, healthy balance sheets and well-covered dividends should find support in this ultra-low rate environment. 
  • For investors with income needs who can stomach some additional near-term volatility and selloffs, we are comfortable taking on more risk in fixed income credit markets given the selloff - including in less-favored sectors like U.S. high yield credit.

Theme 3: Diversify, including your time horizon

  • Even before the coronavirus, we had been cautioning investors that market returns would be lower over the medium to long term (i.e., the 2020s) than they were in the 2010s, which may call for rethinking an overall approach to building portfolios.
  • In our view, most investors we speak with are under-diversified, especially when it comes to fixed income areas such as emerging markets debt and allocations to alternatives, including real estate and real assets.
  • Within real estate, we continue to have an overall defensive positioning, avoiding the retail and office sectors in favor of properties in areas such as senior living, health care and biotechnology. Our public and private real assets holdings are likewise defensively tilted and are benefiting from lower interest rates. We are also finding good opportunities here in themes associated with responsible investing, such as renewable energy.
  • Diversification goes beyond asset classes: We think many investors would benefit from also diversifying their time horizons.
  • The attractiveness of less-liquid private assets can be enhanced during market turmoil by virtue of the fact that they are not marked-to-market on a daily basis. (Consider, for example, that many private equity investments "missed" much of the severe but brief late-2018 correction).


Nicola Mai, portfolio manager and head of sovereign credit research in Europe, and Tiffany Wilding, US economist and Lupin Rahman, head of EM sovereign credit at Pimco commented:

"The Federal Reserve wants to avoid a crisis of confidence.

"Tuesday morning, the Federal Reserve surprised markets with an emergency interest rate cut of 50 basis points (bps). The Fed's move is likely the first in a series of synchronized actions by the G-7 aiming to support developed market economies as the Coronavirus continues to spread outside of China. The Fed's move comes one day after a G-7 meeting in which finance ministers and central bank governors discussed the global economic effects of the Covid-19 outbreak. Even if we see a coordinated global approach from both developed and emerging markets, if the economy remains vulnerable, the Fed may still take additional action in the near future.

"The Fed's shock-and-awe approach was clearly intended to arrest the equity market correction and to stabilize broader financial conditions. Rate cuts cannot stop the spread of the virus, nor are they particularly well-suited to deal with supply chain disruptions; however, they can contribute to an environment where easy financial conditions buffer the economic shock, as opposed to exacerbate it.

"First and foremost, the Fed wants to avoid a crisis of confidence that disrupts public credit markets and leads to an abrupt pullback in bank lending. Without Fed actions to ameliorate market panic, credit could tighten at the same time that weaker businesses run into cash flow problems related to the global disruptions in manufacturing and trade or domestic disruptions in travel and services consumption. Travel and tourism make up roughly 3% of the U.S. economy, while the largest metropolitan statistical areas (MSAs) collectively account for over 30% of U.S. GDP (source: Bureau of Economic Analysis). A U.S. virus outbreak that sharply disrupts activity in these areas could severely depress growth. And as we highlighted in our recent Cyclical Outlook, large areas of the corporate private credit market are especially vulnerable to a general deterioration in economic growth. Private credit, leveraged lending, and high yield markets hold large concentrations of debt in sectors that are highly cyclical. In addition, energy, transportation, gaming, hospitality, and airline sectors all appear vulnerable to a larger U.S. domestic outbreak of the disease, which would limit travel and tourism."

Market response

"History teaches that epidemics tend to have temporary effects on economies and markets. Nonetheless, seemingly temporary revenue shocks, if prolonged, can lead to bankruptcies, rising unemployment, and other adverse effects on the economy before the ultimate rebound. Small to midsize companies, which account for about 70% of US employment (according to ADP), are particularly sensitive to tighter credit conditions and slower growth.

"With that in mind, the equity and credit markets' reaction to the Fed's announcement is troubling. After an initial positive knee-jerk reaction, the U.S. equity market rapidly turned negative, and credit spreads widened. In his press conference following the rate cut, Fed Chair Jerome Powell noted that the Fed is happy with the current stance of monetary policy. However, a continued fall in equity markets suggests that the Fed may need to do more, as early as their March 18 meeting, to stabilize financial conditions. Eventually, additional actions to support banks and ensure ample liquidity across the banking sector may be needed. The Fed's discount window will backstop short-term funding, but the Fed may need to do more where it can if bank funding market stresses flare up."

Synchronized actions around the world

"A coordinated global policy response and targeted fiscal actions are also likely - and needed. As Powell stated, "The virus outbreak is something that will require a multi-faceted response." As such, we expect global fiscal authorities and central banks to act soon.

"The European Central Bank (ECB) will likely increase the pace of its asset purchases and make its long-term refinancing operations (LTROs, which are aimed at improving bank lending) more generous. And while it is possible that the central bank cuts policy rates further, it is far from clear that the benefits of doing so outweigh the costs (see our recent paper, "Negative Rates: Negative View").

"The Bank of Canada is likely to cut its policy rate by 50 bps at its regularly scheduled meeting tomorrow, while the Bank of England could also cut by 25 bps - 50bps in response to market pressures.

"On the fiscal side, governments across Europe will likely add some fiscal easing, although political constraints in the euro area make us wary of expecting much of a response on this front.

"In emerging markets (EM), several central banks are also likely to ease policy in an effort to counter the disinflationary shock, especially given the likely significant spillover of the dramatic drop in Chinese growth. EM real rates (which exclude the effects of inflation) are positive and high relative to those of developed markets, giving central banks relatively more room for interest rate cuts. Also, EM economies are still mostly functioning below their long-term potential, in our view, and we expect this to continue - or even worsen - given the magnitude of the Chinese slowdown; moreover, and importantly, EM inflation dynamics remain contained.

"Most emerging markets are also in a better position than in years past to use monetary policy at their discretion: EM inflation responses to EM currency moves have generally declined and become more stable, giving central banks more room to cut policy rates when faced with macroeconomic shocks. Also, fiscal policy across EM, outside of a few cases, is relatively more constrained and tends to operate with longer lags. We believe that these factors leave monetary policy as the most effective tool that EM economies have to help counter a global slowdown.

"At a global level, synchronized policy stimulus would likely have mutually reinforcing effects and also help keep currency moves in check. On that basis, we expect action soon from fiscal and monetary policymakers around the world."


Jim Leaviss, head of Wholesale Fixed Interest at M&G, commented:

"The Fed surprised markets yesterday with a 50 bps cut - the first move down of this magnitude since the darkest days of the Global Financial Crisis.  Despite this action, economic sentiment deteriorated further and bonds rallied, with a new low yield for the 10 year US Treasury bond, and US equities were down - this "risk off" reaction perhaps reflecting fears that the Fed knows more about the spread of the virus in the United States than has formally been acknowledged.

"Hopefully the emergency rate cut will prove to be an over-reaction from the policymakers, but even if Coronavirus does prove to have a lower impact on health than we currently fear, damage has already been done to the global economy - which, remember, was already slowing in many regions, in part thanks to trade disputes.  Tourism and business travel have been badly impacted, and uncertainty is never good for consumption or business demand.  On the supply side of the economy, factories in China have been closed down, and the movement of goods around the world disrupted.  There is little doubt that GDP growth for almost all countries will be significantly lower than it should have been, and that some will experience recession and lower employment as a result.  Other central banks around the world, including the Bank of England, will cut rates too this month, and as interest rates in some areas are at zero or lower, more extraordinary monetary policy responses will be considered (more QE?).  Unlike in the financial crisis, cheap money can't solve this problem, and, as the virus's impact ebbs and flows, the uncertainty that this generates should keep safe haven assets in high demand.

"For my funds, I want to remain with a long duration position in fixed income.  I'm currently running my biggest duration exposure since the GFC, having added government bonds aggressively in January, thanks to valuations (bonds sold off in the last quarter of 2019), a massive bearish consensus on the asset class, and my expectations that economic growth had started to stall.  I also remind myself that government bond yields have been in a downtrend for 40 years or so now, thanks to ageing populations (more demand for income and lower risk assets), technology (the impact of internet shopping on keeping inflation low for example), and globalisation (cheap goods from Asia), and that these trends generally remain firmly in place.  As I run a global portfolio I can also use currency as another lever to pull for investors, and at the moment the Japanese yen has strong defensive qualities - it is negatively correlated with risky assets like shares, and usually performs well at times of geopolitical instability.  Finally, credit (corporate bonds) have not been immune from the turbulence in equities markets and fears for the economy.  I've had little exposure for months now, believing the asset class to be expensive, although fundamentally strong as defaults are extremely rare currently.  On the sell-off over the past week I've bought some scraps of credit, but I remain extremely underweight.

"Is there any good news?  Yes.  Economic statistics from China are sometimes regarded with suspicion, but we do have some access to some real-time measures of activity there, including pollution and traffic congestion data, and these suggest that the reported levelling off of virus cases there might be real, and that the economic slowdown could be shorter-lived if the rest of the world is aggressive and quick to isolate suspected virus cases. Hopefully this is the case."


Value Partners commented:

"The emergency interest rate cut of 50bps delivered by the US Federal Reserve FOMC is a sensible decision on the back of the Covid-19 situation.

"The virus has been causing simultaneous demand and supply shocks from China, which places noticeable economic influence to global economy. On the macro front, China's first-quarter data is expected to see a sharp decline due to the extended Lunar New Year holiday while resumption of production is going on recently. Market volatility is to stay over the near-term as Covid-19 confirmed cases spread to overseas, although the situation in China shows signs of new cases to peak.

"A positive takeaway is that global policymakers are taking preemptive step to implement countercyclical policies aimed to cushion downside risks. We expect policy easing will be firing on all cylinders in a synchronized manner globally.

"Our view is unchanged that the Covid-19 a one-off event and a sharp slowdown will be followed by more easing measures to ensure a solid rebound of growth after the situation is settled."

Portfolio Implication:

"We continue to avoid companies that are exposed to retail consumption and travel-linked business as they face bigger challenges under the current situation and could take longer time to recover. Our focus remains sectors that will continue to benefit from long-term secular growth trends, such as technology hardware, online business and consumption upgrade. They also tend to be less sensitive to Civid-19's near-term impacts. It is also crucial to closely monitor the development of the situation as prolonged pessimism in the financial market has suggested historically long-term value opportunities emerge when market overreacts to similar market events"


Rupert Thompson, chief investment officer at Kingswood, commented:

"The market reaction to yesterday's move by the Fed to cut interest rates by 0.5% was not exactly what the Fed would have been hoping for. US equities ended the day down 2.8% and 10-year US Treasury yields slid below 1.00% for the first time.

In part, the equity market reaction just reflects the fact that equities had bounced sharply the previous day on hopes of Fed action. It is the first emergency cut since the financial crisis - and the rate cut will be fairly ineffectual in offsetting the coming hit to the economy from the coronavirus.

The Fed cut will very likely be followed by a rate cut in the UK. While these moves may help support equities short term, they do little to reduce the enormous uncertainty over the extent of the eventual spread of the coronavirus and the damage it could have on global growth. A short-lived global recession can be far from ruled out and this is not yet in the price. Global equities are currently down 10% from their highs, some way off the 20-30% fall seen in the a typical recession.  

Until there is considerably greater clarity on this front, it is far too early to say equities have seen a bottom."  


Patrick Moonen, Principal Strategist Multi Asset, NN Investment Partners, commented:

"Although investors are still counting on further policy stimulus, both in the countries that have been hit directly by the virus and by governments and central banks elsewhere, they are likely to factor in more economic and earnings headwinds for the near term. And with the most recent news flow about the virus's rapid spread in South Korea, Italy and Iran, investor focus is likely to remain more on the negative immediate growth implications rather than on the potential V-shaped recovery that should still start in the second quarter.

"Although investors have certainly not given up on stimulus hopes, they can no longer avoid discounting the higher growth risks. This makes risky assets vulnerable to a larger correction than we have seen so far. The correction in global equities seen over the past week is substantial, but without any improvement in the underlying virus data, a sustained market recovery, beyond a technical bounce looks difficult to achieve"


Michael Metcalfe, head of Global Macro Strategy, State Street Global Markets, commented:

"While interest rate cuts can do little to combat the potentially immediate economic shock of the virus, it can boost animal spirits in financial markets and help alleviate a potentially negative spiral between the real economy, financial markets and back into the real economy.

"Our own cyclical measure, the KKT index, has been suggesting a heightened probability of recession even before a potential hit from Covid-19 or its knock-on impact on other countries. China's PMI reading of February was the first hard(ish) data point that seemed to confirm what commodity markets have been trying to say for a while - a global recession is coming.

"Global growth expectations are already on the floor (just below 3%). A sizeable hit from the virus could easily result in a global recession. Action from the Fed this early in the year means that a recession when (which looks more likely than if now) it comes is likely to be shallow and short-lived.

"And the clear signal from today's move is that if this shows signs of not being the case, we can expect further aggressive easing from the Fed and even QE. Given the timing of the move just after the G7 conference call we would assume other central banks will have been given an indication of what was to come, perhaps to give them time to prepare their own response in the next couple of days. The Fed has led but we doubt this will be the only policy support markets receive this month."


04/03 1000 UMT - Emergency Fed cut will not solve underlying issues

Luc Filip, head of discretionary portfolio management at SYZ Private Banking

"The Federal Reserve reduced rates by 0.5% yesterday, a faster cut than previously anticipated. There was clearly a notion of urgency and it will be interesting to see how the European Central Bank, Swiss National Bank and Bank of England react in the coming days.

"Our worry is these measures will not be enough to mitigate the real economic impact the coronavirus is having on global markets. While this cut might help improve market sentiment, we do not believe it will solve the underlying issue companies are facing today - not only is the supply chain down, so is consumer spending.

"The key question is - how long will this crisis last for? We think it is too early to turn bullish, as we are still extremely dependent on the media for updates on the virus. For the time being, there is no clear indication this outbreak has reached its peak. However, we are closely monitoring the news flow coming from companies. This is much more telling than macro figures."