Given the unprecedented state of global markets, we wanted to share with you how our team assess the markets, challenges and opportunities for your portfolios.
During times of heightened volatility and extreme price dispersion, it is important, as long-term investors, to stay patient and true to the goals set at the onset of your investment journey. Although it is difficult to predict how deep an impact COVID-19 will have on the global economy, our priority is to ensure that portfolios are diversified, whilst looking for future opportunities as asset prices adjust to more compelling valuations.
Our base case scenario
As the Coronavirus spreads from East to West – creating seismic disruptions through supply chains and aggregate demand – our base case scenario includes a shock to economies in the second quarter of 2020, resulting in global growth between flat and negative for the full year. However, we still see this shock as transient and expect a significant rebound in the second half of 2020, supported by unprecedented fiscal and monetary stimuli, as well as a deeply discounted oil price which will help reduce the cost of production and boost consumption.
Assuming that your investment time horizon has not changed, global diversification still has benefits. A multi-asset portfolio should remain diversified, combining an equity allocation with diversifiers such as government bonds (both UK and international), mainstream foreign currencies (US dollar, euro and yen) and alternatives.
We are not looking to reduce risk at this stage. We are starting to see investment opportunities emerge in selective areas of credit and in equity sectors. However, valuations are not overly compelling yet for us to make a move and the high level of equity volatility remains a concern.
We are awaiting further evidence to support our view that our base case scenario will hold before increasing allocation to riskier assets. In particular, we need greater confidence in the scope and depth of national and international policy action, as well as signs of stabilisation in sovereign bond and credit markets.
We are seeing clear signs that the gravity of the situation is understood and that policymakers are reacting. We believe that, with the blueprint of fiscal and monetary stimulus from the 2008-2009 crisis, policymakers will employ the means and, more importantly, the motivation to “do whatever it takes” to ensure that any economic recession is as shallow and temporary as possible. This view was supported on 17 March by the US administration asking for a $850bn package of state funding to support the economy, and by the Federal Reserve reintroducing extraordinary tools to maintain financial market stability. Unprecedented measures for unprecedented times.
We will continue to evaluate market opportunities as they arise and will communicate any changes to our views accordingly.
If you have any questions please contact your usual Brown Shipley Adviser.
The Investment Office
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