Looking at the economic impact of Covid-19… 13.03.2020

Thursday panic selling…

Thursday’s market behaviour was panicked and reflected the typical investor reaction to uncertainty at multiple levels. Investors indiscriminately sold the most liquid investments regardless of medium to long term fundamentals; selling everything they could rather than what they wanted. 

What is the likely impact of Covid-19 on the economy?

We do not doubt that the Covid-19 virus will be beaten in due course as the world’s leaders begin to take the necessary, yet dramatic action to delay and / or contain the spread. The outcome could result in a technical recession (two consecutive quarters of negative growth) as economic activity is all but halted for the coming weeks. However, we believe that with the backing of the world’s central banks through unprecedented monetary stimulus, combined with historic levels of government fiscal spending, any recession will likely be short lived, as economic growth should swiftly rebound.

We are sticking to the plan, looking for long term investment opportunities in the noise…

The stock markets are in oversold territory where everything looks cheap and whilst they may fall further, the eventual rebound could be just as dramatic. For this reason, now is not the time to abandon the equity markets for cash as we believe much of the worst-case scenario is reflected in current share prices, with excellent investment opportunities now available for investors with medium to long term investment horizons.

A quick look as to what’s happening on corporate bond markets?

Whilst we do not expect this situation to morph into a 2008/09 type financial crisis, the corporate bond markets are showing signs of peaking. Given the swift action by central banks and governments to provide liquidity, we believe that the plumbing of the financial markets will continue to be supported; however, the corporate bond markets now have limited scope to add much further value from their current price, especially given our view that the economy could recover swiftly.

What have we been doing on client portfolios?

We have been closely monitoring markets and portfolio exposures through the recent market turmoil and have decided to tactically act on the fixed income allocations across the Bespoke, Hardy (formerly MPS & PMPS) and Sustainable Impact Portfolios.

Key actions we have taken:

  • On the Bespoke portfolios we are reducing Corporate Bond exposure with Gilts already positioned underweight.
  • On the Hardy and Sustainable Impact portfolios the teams are reducing both Corporate Bond and Gilt allocations.
  • The sale proceeds will be held in cash in anticipation of reinvestment into broad US and UK equity indices, which at current levels offer rarely seen medium to long term investment opportunities.