Caution as COVID-19 clouds outlook

global perspectives

Caution as COVID-19 clouds outlook

Salman Ahmed, PhD - Chief Investment Strategist

Salman Ahmed, PhD

Chief Investment Strategist

As the COVID-19 pandemic propagates globally, draconian containment measures have been enacted to mitigate the healthcare shock. A number of countries have also unleashed a huge quantum of policy response (both fiscal and monetary) in an effort to alleviate the extremely severe economic and financial implications of such containment measures. 

Our framework to assess the COVID-19 crisis looks at the discrete but interconnected issues at play in today’s highly stressed global economy. These issues are: 

  • The healthcare crisis (the origin of the shock) needing economic shutdown 
  • The ensuing economic damage and policy response 
  • Fractured liquidity (in fixed income, USD and funding markets) 
  • And supply side shocks (including oil)
 
Very rightly, fiscal policy is taking the lead dealing with the economic damage: the role of direct transfers (e.g. money to households) is critical on this front. We are comforted to see the USD2trn package passed by the US Congress. We also believe that the policy moves from the Federal Reserve and the European Central Bank have helped save the global financial system from complete collapse. 

Ultimately, the healthcare crisis needs a vaccine to put the COVID genie back in the bottle. That said, both fiscal and monetary policy measures (especially in developed markets) are exceptionally aggressive and large in order to address the current and expected loss of economic activity and reduce the intensity of systemic risks. 

 

Short term view

Severe challenges and risks remain – chiefly, the risk of reinfection in China - and there is clouded visibility on earnings across countries and sectors. Nonetheless, we expect the most extreme volatility seen recently to diminish somewhat. 
As such, we keep a cautious, somewhat defensive stance and are now focusing on the opportunities that are forming, whilst keeping a close eye on the ongoing spread of the virus. 

 

Long term view 

The strong policy response currently will be critical to improving the quality of the recovery after lockdowns end, in our opinion. The ongoing recovery in China gives us strong reason for optimism. 

In the current context, investors could find value in global and Asia corporate credit (especially in non-COVID impacted sectors) and convertible bond strategies. Also, positively convex strategies could be used as an addition to risk-on exposure when further clarity remerges. We believe these strategies have the potential to generate excess returns as lockdowns in various developed and emerging markets run through.

 

Please click here to download the full document.
 

important information.

This document has been issued by Lombard Odier Funds (Europe) S.A. a Luxembourg based public limited company (SA), having its registered office at 291, route d’Arlon, 1150 Luxembourg, authorised and regulated by the CSSF as a Management Company within the meaning of EU Directive 2009/65/EC, as amended; and within the meaning of the EU Directive 2011/61/EU on Alternative Investment Fund Managers (AIFMD). The purpose of the Management Company is the creation, promotion, administration, management and the marketing of Luxembourg and foreign UCITS, alternative investment funds ("AIFs") and other regulated funds, collective investment vehicles or other investment vehicles, as well as the offering of portfolio management and investment advisory services.
Lombard Odier Investment Managers (“LOIM”) is a trade name.
This document is provided for information purposes only and does not constitute an offer or a recommendation to purchase or sell any security or service. It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful. This material does not contain personalized recommendations or advice and is not intended to substitute any professional advice on investment in financial products. Before entering into any transaction, an investor should consider carefully the suitability of a transaction to his/her particular circumstances and, where necessary, obtain independent professional advice in respect of risks, as well as any legal, regulatory, credit, tax, and accounting consequences. This document is the property of LOIM and is addressed to its recipient exclusively for their personal use. It may not be reproduced (in whole or in part), transmitted, modified, or used for any other purpose without the prior written permission of LOIM. This material contains the opinions of LOIM, as at the date of issue.
Neither this document  nor any copy thereof may be sent, taken into, or distributed in the United States of America, any of its territories or possessions or areas subject to its jurisdiction, or to or for the benefit of a United States Person. For this purpose, the term "United States Person" shall mean any citizen, national or resident of the United States of America, partnership organized or existing in any state, territory or possession of the United States of America, a corporation organized under the laws of the United States or of any state, territory or possession thereof, or any estate or trust that is subject to United States Federal income tax regardless of the source of its income.
Source of the figures: Unless otherwise stated, figures are prepared by LOIM.
Although certain information has been obtained from public sources believed to be reliable, without independent verification, we cannot guarantee its accuracy or the completeness of all information available from public sources.
Views and opinions expressed are for informational purposes only and do not constitute a recommendation by LOIM to buy, sell or hold any security. Views and opinions are current as of the date of this presentation and may be subject to change. They should not be construed as investment advice.
No part of this material may be (i) copied, photocopied or duplicated in any form, by any means, or (ii) distributed to any person that is not an employee, officer, director, or authorised agent of the recipient, without Lombard Odier Funds (Europe) S.A prior consent. ©2020 Lombard Odier IM. All rights reserved