Market Notes

Christopher Peel, CIO of Tavistock Wealth - 23rd March 2020

In the past three weeks, global equity markets have fallen almost as much as in the Financial Crisis of 2007-08.

This is extraordinary given that this is not a financial/banking crisis, but a short-term collapse in demand resulting from government-imposed quarantine measures. Objectively, there are two diametrically opposed global events playing out at the same time, the spreading coronavirus and a collapse in the oil price. This has caused panic selling of equities and a flight to safe-havens such as the US dollar, G7 government bonds 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.”

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 now, there is no cure, but mercifully the recovery rate is estimated to be circa 98%.

However, scientists all over the globe are working around the clock and I would speculate that these clever 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 and hopefully they will be effective. The impact of quarantined areas will certainly reduce economic growth in the short-term, but central banks have reacted quickly by slashing interest rates and pumping huge sums of liquidity into the system in an effort to cushion the blow. Governments throughout the world have also pledged trillions of US dollars in fiscal aid to soften the economy slowdown. 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 we expect to happen in the second half of the year.

“Earlier in the month, the OPEC cartel failed to reach an agreement on supply cuts, which has caused a plunge in the price of Brent crude oil from $50 to $25 per barrel.”

Earlier in the month, the OPEC cartel failed to reach an agreement on supply cuts, which has caused a plunge in the price of Brent crude oil from $50 to $25 per 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 for 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 stabilise, 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.

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 investors 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 high yield and emerging market bonds and increased cash levels to a minimum of 10% across the portfolios for liquidity proposes.

Christopher Peel
Chief Investment Officer

Sadly, it is unclear if the proposed course of actions will stop the rampaging virus.

However, it is already evident that the economic damage caused by the lock-down will bring catastrophic hardship to millions of people around the world. I remain an optimist and strongly believe that the combined efforts of central banks, government officials, scientists and warmer weather will bring an end to this madness within months. Equities are cheap, bond are expensive, and liquidity is king.

THE HOUSE VIEW REMAINS UNCHANGED:

THE WORLD IS NOT COMING TO AN END!

WATCH THE INTERVIEW ON CNBC BELOW:

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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