Friday 3rd April 2020
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‘It's too late to sell and too early to buy,’ says one fund manager
The violent phase of the adjustment has passed, many investors think, but the perils to investments have not
Many investors still reeling from the brutal first quarter of 2020 are reluctant to believe it is safe to dive back into risky bets.
Key benchmarks including the S&P 500 in the US have bounced strongly since the coronavirus pandemic first tore through markets in late February. Starting from their low point in late March, US blue-chip stocks have soared by 17 per cent.
The rebound is one of the biggest since the aftermath of the Wall Street Crash in 1929, but still leaves stocks down 20 per cent so far this year. The recovery largely reflects the firepower deployed by central banks to calm a financial system that was brought to a sudden halt by lockdowns of cities and countries around the world.
But while calm has been restored, many investors think it simply marks a new phase in the markets’ struggle to adapt to a rapidly shrinking global economy stung by both the virus and a collapse in the price of oil. The violent phase of the adjustment has passed, they say, but the perils to investments have not.
“The way we put it is: it’s too late to sell and too early to buy,” said Kasper Elmgreen, the Dublin-based head of equities at Amundi, Europe's largest asset manager. “I’m pretty sceptical of the current bounceback that we have seen.”
The darkest point of the market crisis in mid-March resembled the shake-out that many fund managers remember from 2008. Stock indices in major economies were dropping by about 10 per cent each day. The dollar was rattling higher at an alarming speed as companies hoarded greenbacks just like households stockpiled pasta.
Perhaps most concerning of all, the government bond markets started to malfunction, removing fund managers’ ability to hedge against sliding stocks and threatening to tip the financial system into chaos. Large parts of the corporate bond markets were untradeable — investors could not offload their holdings at any price.
“March was like a bomb went off; two bombs, in fact, with the virus and [the oil shock],” said James Athey, an investment manager at Aberdeen Standard Investments. “That hit vulnerabilities in markets, but it was . . . not an economic shock. It was ‘get me out of here at all costs’.”
The picture changed only when governments and central banks unleashed their full firepower at the crisis, promising to help shield business and households from insolvency, to buy financial assets in huge quantities, to pump liquidity into short-term funding markets and to quench the global thirst for dollars.
“Policy responses have saved the system,” said Salman Ahmed, chief investment strategist at Lombard Odier Investment Managers. The virus is a global health crisis and the efforts to control it — shutting down human interaction and activity — have created an economic crisis. But, Mr Ahmed said, measures to soothe the dollar and the debt markets had prevented this from becoming a financial crisis, too.
“That could have brought the system down, but it has eased,” he said. “When we had moves of 9 to 12 per cent every day, that was not just the virus. A lot of the damage was caused by systemic risk. We could still have 3 to 5 per cent moves, but central banks have tried to make sure this remains a virus crisis.”
A slow grind lower for stocks and riskier parts of the bond markets may lie ahead. “We are past peak panic, but not yet at peak pessimism,” said Mr Athey. Companies are cancelling dividends and stock buybacks to absorb the hit to economic growth, which also threatens further debt downgrades and defaults. Bets that some assets are cheap rely on earnings expectations that are now well out of date and subject to unprecedented uncertainty.
The spread of the virus across North America could spark a renewed sell-off. “The market is not priced for the US to be shut down for months on end,” said Mr Athey.
Some investors are dipping a toe back in, including hedge funds seeking to grab what they judge to be bargains. Toby Nangle, global head of multi-asset at Columbia Threadneedle in London, lauded policymakers’ determination “to prevent the public health crisis metastasising into a global financial crisis”, adding: “All else equal, we will be deploying more portfolio risk.”
Upping risk will not be a straightforward job. “We are looking for companies with a strong balance sheet and the liquidity to survive” in a period with little to no revenues, said Mr Elmgreen at Amundi.
Sectors, including infrastructure and air transport, “have been absolutely annihilated”, he said. “If you are running a business, you don’t know if you are going to be there in one month, two months, three months. But you can find companies that have strong balance sheets and can weather the storm.”
Source: Financial Times
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