Market NotesChristopher Peel, CIO of Tavistock Wealth - 13th March 2020
In the past week, global equity markets have fallen again and yields on developed market government bonds have collapsed even further.
In my opinion, there are two diametrically opposed events playing out at the same time. This has caused the panic selling of risk-assets and a flight to safe-havens such as US treasuries and gold.
The spread of the COVID-19 coronavirus outside of China is gathering pace and cases have now been reported across more than half of the world. As of yet there is no cure. However, scientists around the globe are working on an antidote and I would optimistically speculate that these bright minds, with the support of the World Health Organisation and government officials will come up with a solution in a timely manner. Drugs are already being tested in China and hopefully they will be effective. The impact of quarantined areas such as the Hubei province in China and in the Lombardy region in Italy will certainly reduce economic growth in the short-term, but central banks have reacted quickly by slashing interest rates in an effort to cushion the blow. Similar outbreaks such as SARS, Ebola, Swine Flu or the Zika virus suggest that the sell-off in equities will be sharp and short-lived, followed by an equally strong recovery. This is what I expect to happen in the coming months.
Eight days ago, the OPEC cartel failed to reach an agreement on supply cuts, which has caused a plunge in the price of oil from $42 to $32per barrel. In the very near future, this steep fall will act as a huge economic stimulus in countries that import oil such as South Korea, China, India, Japan and most of Europe. The losers will be the Middle East region, Brazil, Mexico, Canada and the shale industry in the US. The net effect is positive from the global recovery and will offset some of the downturn stemming from the spread of the virus in China. It is difficult to predict when the price of oil will recover, but the longer it stays at the current levels, the better chances of a quicker recovery from the impact of the virus.
Our positioning until last week had been little changed since the beginning of the year. We believe the economic impact from the virus will last between 1 and 2 quarters. A drop in global GDP over a short period of time will not come as a surprise to markets given the extent of the quarantine measures enacted around the world. However, the coordinated central bank interest rate cuts, fiscal spending measures by governments and the lack of leverage in the financial system will ultimately lead to a return to normality in the very near future. As a result, we have tilted equity exposure in favour of oil importers, healthcare and technology. We have also trimmed positions in inflation linked securities and levelled cash at 5% across the portfolios for liquidity proposes. The house view remains unchanged – the world is not coming to an end!
This investment Blog is published and provided for informational purposes only. The information in the Blog constitutes the author’s own opinions. None of the information contained in the Blog constitutes a recommendation that any particular investment strategy is suitable for any specific person. Source of data: Tavistock Wealth Limited.
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Welcome to the Q2-2021 ‘Quarterly Perspectives’ publication
In its latest economic outlook, the OECD increased its expectations for global GDP. For 2020, the improvement is minimal, reflecting an upward revision, in real GDP, from -4.5% to -4.2%. But beyond that, growing economic momentum should boost global growth to pre-pandemic levels, estimated at 4.2% in 2021 and 3.7% in 2022.
Markets are ebullient, and they have every reason to be.
On Monday afternoon, global stock markets soared on the news BioNTech and Pfizer had created a coronavirus vaccine which proved 90% effective based on initial trial results. The story behind the breakthrough, which you can read here, is fascinating, not least because the husband and wife team behind the virus don’t yet know why it works.
The narrative, heading into the US election, was a ‘Blue Wave’ victory for the Democrats. Polls and betting odds favoured a Biden win and a Senate majority and investors positioned accordingly. Anticipation for a huge fiscal stimulus package, estimated at $3 trillion+, lent itself to the global reflation trade which would stimulate the economy and revive inflation, benefiting cyclical assets whilst hitting government bonds.
The ACUMEN Portfolios continued their strong run throughout October, largely outperforming the market composite benchmark and IA sectors (used for peer group comparison purposes) which lost ground across the board.
With the US election just 8 days away, financial markets are following the polls and pricing in a Biden win. The prospect for a Democratic clean sweep has contributed to the rising ‘Blue Wave’ narrative benefiting those companies that stand to benefit from Democratic party policy. Meanwhile a long/short basket of companies more closely aligned with Republican policy and values has steadily underperform.
Welcome to the Q4-2020 ‘Quarterly Perspectives’ publication.
On Tuesday Fed Chairman, Jerome Powell, made a speech at the National Association for Business Economics, during which he implied the government should err on the side of caution and provide too much stimulus rather than too little.
Saturday Night Live has a reputation for expertly parodying presidential election debates. My all-time favourite is Al Gore (Darrell Hammond) versus George Bush (Will Ferrell) and this year didn’t disappoint with expert performances from Donald Trump (Alec Baldwin) and Joe Biden (Jim Carrey).
The following is an abbreviated version of my recent article ‘A Deep Dive Into… UK Equities’ for Investment Week magazine. Follow the link and read my views on page 17.
Last week the FTSE Russell decided to include Chinese government bonds in its flagship World Government Bond Index (WGBI). The decision follows similar moves, from JP Morgan and Bloomberg, and a failed attempt to do so just one year prior which resulted in a number of reforms, to increase accessibility and currency trading options, that ultimately paved the way for benchmark admission.