Johanna Kyrklund: How we’re positioning for coronavirus

Recent years have been characterised by weak but positive global growth, with global GDP growth stuck around 3%. Whilst that level of growth is sustained, with the benefit of low interest rates underpinning valuations, equity market performance has been supported.

The challenge with the absence of strong economic momentum, however, is that it leaves markets vulnerable to economic shocks. 

This market backdrop has led our multi-asset investment team to be invested in equities, as low rates have pushed investors up the risk curve in search of returns. We have also had offsetting positions in hedges against the possibility of economic growth disappointing; namely, bonds, Japanese yen and gold. 

At the same time, we have been avoiding more cyclical (economically sensitive) positions such as value stocks and commodities.

This combination of positions has enabled us to weather the most recent correction in risk assets, as our hedges cushioned our multi-asset portfolios and we had low exposures to some of the hardest hit equity markets, like Europe and energy stocks for example. 

The multi-asset investment team met this week to consider whether we should shift our stance and came to the following conclusions:

  • At the very least, efforts to contain the virus will short-circuit the nascent recovery we were seeing in the data and so we continue to avoid cyclical areas of the equity market and commodities
  • We are likely to see a response from central banks shortly which should help to stabilise sentiment. We have since seen the Federal Reserve cut interest rates. Importantly, we don’t believe that lower interest rates will re-ignite the economic recovery, but they do have an important effect on valuations and support a continuation of liquidity-fuelled equity returns. However, this is not a time for blithe risk-taking; we need to see evidence of a peak in infection rates or more information on the economic damage in the form of corporate earnings announcements or economic data before we can wade back into risk assets and so for now we remain at neutral.
  • Our government bond positions are now very expensive following the decline in yields. We have lightened up on our rates exposure but still believe that bonds are a “seat belt” on our portfolios in case economic disruption caused by attempts to contain the coronavirus tip us into a global recession, so we still have a small long duration position in our multi-asset portfolios.
  • We continue to favour the Japanese yen as a safe haven in currency.

All in all, we have lower risk levels than usual. Ultimately, our expectation is that the impact of the coronavirus will be significant but transitory. Our bias is to look for opportunities to generate return, but we also need to be humble about our lack of knowledge on the future development of the coronavirus.

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