global perspectives
Caution as COVID-19 clouds outlook
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:
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The healthcare crisis (the origin of the shock) needing economic shutdown
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The ensuing economic damage and policy response
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Fractured liquidity (in fixed income, USD and funding markets)
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And supply side shocks (including oil)
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.
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