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A fragile stabilisation


MONTHLY INVESTMENT BRIEF

APRIL 2020

 

Laurent Denize

Laurent Denize,
GLOBAL CO-CIO &
GLOBAL HEAD OF FIXED INCOME


Irrespective of how investors are positioned today, what clearly matters most now is being able to adjust allocations depending on events and how investors interpret them

It seems futile indeed to make predictions about the economy and the market when there is so much uncertainty about the pandemic itself. To be perfectly honest, no one really knows how things are going to pan out over the coming year. Only if a vaccine or effective treatment becomes available reasonably soon will it be possible to successfully halt the pandemic and put a cost to it. In the meantime, the social and economic disruption will intensify further until the spread of the virus begins to slow. We therefore dare not make any projections about the magnitude of the recession, the unemployment rate or even the drop in corporate earnings. The world’s leading epidemiologists are still as yet unable to assess the effects of the lockdown, let alone build scenarios for easing the quarantine. How does one assess the consequences in this case? To do so would not be of much use, and it would make little sense.

So what is an investor to do?

  • We can no longer rule out the extreme risk of a pandemic that might last and even intensify. Although this is not the most likely scenario (fortunately), it would trigger such a broad economic depression that all types of assets would be affected. If all the signs were to point in this direction, investors would have to be able to liquidate their most risky assets, i.e. prioritise liquidity. Amid such uncertainty, we all need to question our assumptions all the time and be prepared to make a U-turn if necessary. This is the first stage of our analysis, i.e. survival, the aim being to not make too much of a dent in one’s risk capital or risk budget and to have resources to reinvest.
  • The most likely and consensual scenario (based on what we know today) is that the pandemic will end during the summer and that the quarantine measures will be eased only slowly as it will be a complex process. So we can expect major macro and microeconomic impacts on the countries most affected by the pandemic. However, the speed and scale with which the authorities are introducing monetary and fiscal stimulus packages are likely to limit the length of the recession and help to avoid a depression
  • Nor should we rule out the possibility that a drug, vaccine or other specific parameter (e.g. heat) might wipe out the virus and help life return to normal. This too seems rather unlikely, but in this case risky assets would enjoy a boomerang effect accentuated by the liquidity injected by central banks and the economic stimulus plans launched by governments. Once again, the aim for investors is to prioritise agility and liquidity so that they can rapidly take up positions again on the most sought-after assets.

 

In short, irrespective of how investors are positioned today, what clearly matters most now is being able to adjust allocations depending on events and on how investors interpret them. After all, we must not forget that the financial markets do not always behave in a rational and logical way by analysing and correlating the situation with macro or microeconomic factors; their behaviour is also driven by human and cognitive factors. There is therefore a possibility that the “market” might, at some point, decide that the worst is over and deploy the massive flood of liquidity unleashed by the central banks.

To conclude, I would like to offer you a FactSet analysis which shows that the MSCI World index delivered an annualised return of 7.5% over the 15 years up to the end of December 2019.

If you missed the 40 best trading sessions, you would have lost 2.5% on an annualised basis.

Stay invested… in liquid assets; illiquid assets, meanwhile, are still a good option for investors looking to avoid volatility and who have no liquidity needs for the next 8 years...

 

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