Risks and opportunities in fixed income
by Andrew Hardy, CFA
Bonds, issued by both governments and corporates, will always have a significant role to play in multi-asset portfolios due to their inherent stability and reliable cash flows, which provide much needed balance for other riskier positions. However, recent developments spurred on by the COVID-19 crisis should prompt investors to consider deemphasising the focus on government bonds from this point and increasing allocations to corporate credit.
Market Snapshot
- Positive trial results for COVID-19 treatment and vaccine boosts sentiment
- European countries plan loosening of lockdown measures and partial reopening of economies
- Brent crude rose 23.3%, ending the week at $26.4 a barrel
- Gold fell 1.7% ending the week at $1700.4 an ounce
COVID-catalysed structural changes in global real estate?
by David Lashbrook CA (SA), CFA
As a landlord and investor in real estate, I am closely watching how the world adapts to the global lock down. In our case at Momentum Global Investment Management, the transition from office to homebound working has been seamless. I wonder if this is going to cause a structural change in the demand for office space over the medium term as companies renew their current lease commitments and review their ongoing office accommodation requirements.
Market Snapshot
- Weak earnings and oil market chaos hit equities
- April flash PMIs point to crippling impact of the pandemic
- Brent crude fell 23.6% ending the week at $21.4 a barrel
- Gold rose 2.8% ending the week at $1729.6 an ounce
Drop the top
by Richard Stutley, CFA
A lot has changed and at the same time many aspects of our lives and work go on much as before. We met last week for our regular round of asset allocation meetings just like we always do, only this time via video link rather than all sat around the desk. One area that looks interesting to us currently is convertible bonds, which in many cases are trading cheap relative to their component parts: the straight bond and the equity option. While convertible cars, or drop-tops, tend to dominate the drawdown phase of most people’s lives, convertible bonds have something to offer in the earlier accumulation phase.
Market Snapshot
- The global number of coronavirus cases surpassed 2 million last week
- China printed a 6.8% first quarter fall in their year-on-year GDP growth
- Brent crude fell by 10.8%, ending the week at $28.1 a barrel
- Gold fell 0.8% ending the week at $1682.8 an ounce
Three months ago, investors were looking forward to an improved year of global growth and corporate earnings. That was then. The coronavirus crisis is an era defining event; life before coronavirus and life afterwards. Above all it is a humanitarian crisis on an epic scale, the speed of its destruction amply illustrated by its spread: on February 29th there were 85,000 confirmed cases across 58 countries, with 2,924 deaths, by 6th April there were 1.25m cases and over 69,000 deaths as the pandemic reached 207 countries.
Some things never change
by Michael Clough
In many ways, life has changed so much in recent weeks. Our usual routines suddenly seem distant memories. In other ways though, some practices haven’t changed at all. The ongoing management of our portfolios and two key components which underpin this, asset allocation and manager research, have continued uninterrupted. Of course, the way we carry them out has changed.
Market Snapshot
- Global equities reverse some of the previous week’s gains, but relatively contained
- Global employment numbers and service sector PMIs plummet
- Brent crude surged 36.8%, ending the week at $34.1 a barrel
- Gold fell 0.5% ending the week at $1620.8 an ounce
China’s recovery
by Stephen Nguyen, CFA
We are living in unprecedented times, with much of the world under lockdown due to COVID-19. There are a multitude of potential outcomes resulting from the increasingly extreme global measures being taken to prevent its spread and of course many unanswered questions regarding the lockdown exit strategy or how it all ends. While we are yet to change our portfolios allocations materially, we are making evolutionary changes to the underlying holdings to emphasise balance sheet strength. It doesn’t presently seem appropriate to add significantly to portfolio risk: we stick to our unwavering belief that a well-constructed diversified portfolio is the most efficient way to achieve longer term outcomes. Nevertheless, it is instructive to sketch positive scenarios into our outlook and where better to look for inspiration for a positive spin on events than China, which was the first country to go into full lockdown at the end of January. What can we learn and more importantly what can we expect?.
Market Snapshot
- US equities rebounded by record amounts early in the week
- The US agreed upon a $2.2 trillion fiscal stimulus package late Tuesday
- Brent crude fell 7.6%, ending the week at $24.9 a barrel
- Gold rose 8.6% ending the week at $1628.2 an ounce
(iI) Liquidity of Property
by Jackson Franks
As we temporarily enter a new way of living, I spent Wednesday night giving my grandparents a step by step guide on creating a Skype account. After a good 45 minutes (which felt like weeks) and a lot of patience we managed to complete the process. They couldn’t quite believe that they could see me and me them as we sat down to eat dinner together via Skype. With my Grandpa’s interest in the financial markets, especially the real estate sector, we had a lot to talk about considering six UK open-ended property funds were suspended last week with the expectation that others will follow this week.
Market Snapshot
- The rapid spread of COVID-19 has led to the continued lockdown of parts of Europe and the US, although a steady slowdown in cases is being seen in Italy
- Global equity markets declined 12.2% over the past week
- Brent crude fell 20.3% ending the week at $27.0 a barrel
- Gold fell 2.0% ending the week at $1498.7 an ounce
After a period of remission verging on complacency, markets were dramatically infected by coronavirus in the final week of February, with the sharpest weekly fall in equities since the financial crisis. The trigger was the realisation that the spread of the virus beyond China, and in particular into Europe, was not only inevitable but immediate, with Italy’s economic
heartland suffering an extremely serious outbreak which is still in its early stages. Taking a line from the damage caused to China’s economy, investors began to discount a very sharp contraction in economic activity in Europe, and globally, as the virus continues its inevitable spread, now in 86 countries and rising. The impact on economies is immediate, with factories closed, supply chains interrupted, travel and leisure activities curtailed, services withdrawn and large parts of the worst affected countries, China, Italy, South Korea and Iran (and the expectation of many more to follow), in effective lockdown.
The Bear Necessities
by Robert White, CFA
“There are decades where nothing happens; and there are weeks where decades happen”. After the longest bull market on record finally came to an end last week, Lenin’s famous quote concisely sums up the current mood among investors. The S&P 500 officially moved into bear market territory on Thursday after it breached the 20% level in a record 16 sessions of trading. Such price action reflects the tragic reality that the coronavirus has now caused the death of thousands globally, and the focus quite rightly is on limiting its human cost. Amidst the barrage of negative news, it is important for long term investors to act rationally and take account of the situation as it develops.
Market Snapshot
- The rapid spread of COVID-19 caused significant portions of Europe to lockdown
- Global markets declined 12.4% over the past week
- Brent crude fell 25.2% ending the week at $33.9 a barrel
- Gold fell 8.6% ending the week at $1529.8 an ounce
Tipping point
by Alex Harvey, CFA
When the seeds of the Arab Spring were sown in 2010 in a market in Tunisia, few would have foreseen the chain of events that followed. The resulting wave of civil protest and unrest that rippled across north Africa led to the collapse of regimes and leaders that had been in place for many decades, most notably Muammar Gaddafi. Roll forward nearly a decade and 9,123 kilometres and another otherwise unremarkable marketplace finds itself at ground zero for the current bout of volatility in markets. In reality there is little to link these events, but the pattern of snowballing and onward contagion is perhaps not so different as camels’ backs get broken.
Market Snapshot
- Global equity markets volatile in response to the coronavirus
- Bond yields tumble as investors go risk-off
- Brent crude tumbles around 30%, currently at $36 a barrel
- Gold rose 5.6% ending the week at $1665.9 an ounce
