Equity markets tumble, but how should one react?
The equity markets are falling precipitously. At the time of writing, high single digit losses are no exception. So what is going on?
Covid-19, the coronavirus, is still at the heart of the turmoil. Around a third of Italy’s GDP is quarantined and the virus keeps spreading in Europe. However, over the weekend Saudi-Arabia launched a bomb shell in the oil markets, deciding to go for an all-out price war. After a failed deal in OPEC+, the country wants to boost production and grab market share. As a result, the oil price has fallen by over 20%* today. The markets now fear a deflationary shock, with government bond yields hitting all-time lows, as forward looking measures of inflation expectations fell sharply.
While all this red ink might cause some panic, we believe one should not throw in the towel. Our neutral to slightly positive stance regarding equity has been accompanied by some pretty defensive assets, which have cushioned the blow. Our exposure to gold and government bonds has clearly helped, somewhat mitigating the impact from the equity exposure. We have been overweight in sectors like IT and healthcare while avoiding oil and more cyclical sectors. Our overall equity exposure has proven to be more defensive, which is serving us well in these times of heightened volatility.
Moreover, we don’t believe we need to change the overall positioning immediately. We continue to believe the coronavirus to be transitory in time. We do expect the global economy to rebound in the second part of the year. Moreover, central banks and governments are already riding to the rescue of the global economy, cutting rates and promising fiscal spending to soften the impact from the virus on corporates and consumers. And as they say, when policy makers panic, investors should not.
Meanwhile we do see the correction also in currencies. The Euro is notably higher versus the greenback, as are the Yen and the Swiss Franc. A reduction in the yield spread, as US yields tumble, is part of the explanation, and so is profit-taking on US assets implying a turnaround in investment flows.
Regarding the future, we would only change our current stance if our assumptions about the economic impact of the virus and the central banks and government commitment were to be revised, or if we thought markets were mispriced. On the economic front, we will keep a close eye on the US consumer in particular as an important driver of global growth. In addition, we are closely watching the possible knock-on effects from lower oil prices on the energy industry and on credit markets. We will also keep track of underlying valuations for all asset classes, and stand ready to adjust the risk exposure in our portfolios accordingly.
For now, we prefer not to alter anything, as we are convinced that current investment portfolios are well-constructed and can withstand the bout of weakness in equity markets. Needless to say, should our opinion change, we will be back with more data and updates.
This document is for information purposes only. It does not constitute investment advice and is not a
recommendation for investment.
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