The coronavirus (Covid-19) continues to make its presence felt, and financial markets are struggling.
The S&P 500 saw its fifth-largest one-day sell-off on Thursday (March 12), and Asian markets have continued in that trend. Both Thailand and India's stock markets had to halt trading on Friday morning (March 13), after the former's Nifty 50 index fell 10% and the latter's SET Composite index also fell by 10%. Japan's Topix 500 was down 6.85% from its previous close in afternoon trading.
The market drops reflect concerns that the US and European Union in particular are proving inadequate to the task of halting the spread, offering insufficient stimulus or liquidity measures, and that the spread of the sickness will be harder to overcome as a result. Fears of a global recession are rising.
Against this highly volatile backdrop, we asked how fund managers and experts on how asset owners and other investors should respond.
The below remarks are based on timeliness, with the uppermost the most recent received. All remarks have been edited for brevity and clarity.
Paul Gambles, director
MBMG Investment Advisory
We’ve now seen the final(ish) capitulation of the Fed, with their emergency 100 basis points (bp) interest rate and announcement of further quantitative easing (QE). I’d been expecting effectively another 75bp plus some form of QE on Wednesday (March 11) so the timing and scale suggest that data in the US indicate a much higher risk now of a so called technical recession in the US in the first quarter and second quarter.
It also suggests a degree of panic among policymakers about the ultimate economic impact of Covid-19. This fits in with MBMG’s 2020 Vision and Beyond outlook published at the beginning of the year.
We’ve now seen last year’s repo-reflation Trade not only dead but comprehensively buried. We’ve also seen the monetary policy response (so far). We wouldn’t be surprised to see the Fed move to the -0.25% to 0.00% benchmark interest rate range, with a justification that this is only technically or potentially negative (a bit like telling someone that they’re only technically or potentially pregnant? You either are or you aren’t).
Daniel Jim, founder
We have been looking for a catalyst for two years; the market didn't crash in 2018 despite a small selloff, and it quickly rebounded last year. No one would tell you valuations were cheap before, so the coronavirus outbreak became the perfect catalyst for a much-needed correction that's been pent up a long time ago.
It's a good thing in the long run. But the fundamental issues have not really been resolved over the years even though the global market plunged because central banks have been pumping money into the system. And these have led to a big wealth gap, giving rise to populist politicians, tensions and decoupling movements. These issues are still persisting to this day.
The rich might have lost a bit of money this time round but the poor did not benefit from it, if anything, they might have lost their jobs.
Claudia Calich, fund manager
"Brand new scenarios for oil prices have been sketched out for 2020 and 2021 by the markets. They had to gauge not only the potential impacts of Covid-19, but also an oil price war. One scenario involves Saudi Arabia’s move provoking Russia to change its stance and agree on oil supply cuts, lifting prices in the process. But this was not the prevailing view. Instead the idea that oil prices might remain in the 30s over 2020 has dominated market thinking.
"Emerging markets tend to feel strain when global oil prices drop. There is a clear impact on the oil producers. Meanwhile, oil-importers might see some balance of payments pressures easing. However, they also tend to face higher costs of borrowing and the effects of weaker market sentiment. Furthermore, oil importers are more likely to be tourist destinations than oil producers. Hence they are braced for lower FX earnings as Covid-19 travel restrictions limit visitor numbers.
"For the oil producers a move of this magnitude requires adjustment, with oil prices as much as $20/bbl below the level on which 2020 budgets were calibrated. Countries with large balance sheets, flush with saved financial assets, look stronger than those without such assets. For others with a weaker balance sheet, it is a matter of how long FX reserves will last at different extents of fiscal and external adjustment.
"Countries with pegged currencies are likely to need more FX reserves, than those who can adjust their exchange rates."
A senior investment executive
A Bangkok-based insurance company
"Obviously we have entered into the bear market already, and we still think that this is an event-driven bear market at this stage. In terms of portfolio positioning, we will not increase exposure to risky assets, primarily equities, at the moment until we see some positive signs in terms of the number of confirmed cases in Europe and the US."
Robert Penaloza, chief executive of Thailand
Aberdeen Standard Investments
"My advice would be to stay rational and focus on the longer term. This environment is what every long term stock picker looks for ie buying well researched solid businesses when everyone is fearful and irrational."
Senior investment exective
A Singapore-based asset owner
"What has been a China / Asia problem 1.5 months ago has suddenly spread to the western markets over the last three to four weeks. The turbulent price action reflects: (1) the market suddenly repricing a recession, (2) Leverage in the system (3) western governments' lack of will to tackle the crisis compared to Asian governments that had the Sars experience.
"Fear has reached crisis levels / extreme levels and there should be a short term technical rebound as we head into Fed week next week. However, with the many levels of buyers who were trying to buy the bull market dips being trapped, we should see continue margin calls on the retail leverage clients and hedge funds getting into trouble.
"Big pocket long term investors may try to allocate to some money here, but some shake out move are expected before equity markets finds a bottom, which may coincide when US virus numbers converge to reality."
Senior private equity investment executive
A sizeable Malaysian asset owner
"From our side, we think it's a very short-term thing. When we say short-term it's probably within the next six months or 12 months. Yes everything will be readjusted, there'll be a slowdown in some of our underlying companies and underlying funds, earnings and whatnot, but we think it's actually representing a good opportunity for some of the valuations to be readjusted.
We think it's actually representing a good opportunity for some of the valuations to be readjusted
"What we had been seeing previously was that a lot of the valuations just didn't make sense for some of the acquisitions and we were worried. But I think we'll still consistently deploy because we don't know when it stops and we can't time it. Since now it's really happened we see it as an opportunity for the valuation to reset and it's actually a good thing for private equity funds that are fundraising or investing in the next three to four years.
"Based on data, [private equity] funds that started investing post-2009 turned out to be the best vintages ever in the last 10 years. We talked to some of our underlying funds, a lot of them think that due diligence and whatnot are prolonged, but it doesn't mean deals are being canceled. It just takes a longer time. To a certain extent, on one hand, you have deals being delayed, which is not a good thing, but at the same time, those that are being readjusted and it's actually a good thing."
A K Sridhar. director of investments & chief investment officer
IndiaFirst Life Insurance Company
“Primarily the fall of Indian equities is due to huge selling by global investors (what we call ‘foreign portfolio investors’). There is not much selling by Indian domestic entities. At the same time, there is no courage put in money by domestic institutions or even retail investors. Everyone considers this as a ‘falling knife’ moment.
"Having said that, prior to this recent fall, the Indian equity markets were very expensive. Indian companies have not been making any good profits and have not even seen growth over the last five or six years in a row now. All through the last few years, Indian markets were running up just because of a rally of equity markets in developed markets. So markets become expensive on a price-to-earnings or price-to-book parameters. It was just waiting for a reason for a correction.
"There is not enough dry power now with the Indian economy to dole out sweeteners by policy initiatives. In 2008, the Indian economy was having good numbers – be it fiscal deficit, interest rates situation, inflation or demand – all were favourable to pump money into the economy. Now, there is no good dry powder left to pump up economy. I would not be surprised if all the companies show very poor growth in the next two or three quarters for sure. So, this fall might take more time to recover. Having said that, all the actions taken by US or the larger economy to contain the coronavirus issue is too drastic. It does affect and everyone was caught unaware.
Over the next few days / weeks, the market will provide a good opportunity to take large exposures to equity ... if you take a two to three years bet, there is an opportunity
"Having said, in the next few days / weeks, the market will provide a good opportunity to take large exposures to equity and of course, the reward for that may not be visible immediately. But if you take a two to three years bet, there is an opportunity."
NEWS: Sri Lanka's equity Market was halted at 10:02am for 30 minutes after the S&P index dropped over 5% from the previous close (as per an update from Kanishka Hewage, CEO of CT CLSA Securities).
Krishna Kumar, portfolio manager
"From the team’s perspective, we might expect to observe vulnerability from stocks with already stretched valuations. For example, supply chain pressure may impact the market sentiment for some of the very expensively valued technology-related names. We could also expect risks to be to the downside for the expensively valued consumer names which have benefitted from the Chinese tourism and consumption theme.
"The recent oil supply shock has also heightened fear relating to a potential slowdown in global growth. There remain question marks surrounding issues such as impacts to supply chain disruptions, the potential impact on consumer demand and therefore economic activity. On the stock front, we have observed price corrections in many oil & gas related companies on concerns over global oil-demand growth and a sharp fall in oil prices. That said, we have taken this as a stock picking opportunity to exploit, especially in stocks that have been sold off more than justified.
The prevailing market overreaction has more than priced potential negative impacts to global economic activity
"Amidst the uncertainty, the team will continue to focus our attention on monitoring and assessing any material risks to the longer term sustainable drivers of returns for our holdings. Key considerations today is firstly, to test a company's ability to fund its longer-term operations amid the potential for further cyclical disruptions, and secondly, to test whether we have enough margin of safety to compensate us for our patient time frame.
"The prevailing market overreaction has more than priced potential negative impacts to global economic activity. We do, however, expect that there will likely be disruptions in the shorter-term, which may increase the cyclicality of earnings for companies.
"As bottom up stock pickers, we see such shorter term noise leading to weakness in the market as an opportunity to identify mispricing in the market when there is a material dislocation between price and intrinsic value relative to its longer term sustainable trend earnings."
Kerry Craig, global market strategist
JP Morgan Asset Management
“I would say the size and the pace of which we’ve seen in the equity market move over the course of the last few days would definitely lend itself to be at the more extreme end in history. Anytime the market falls that quickly does become very painful.
"I don't know if I'd call it a 'crisis' as such but I think the realisation around the unknown would come with the virus spread and the reaction of certain economies such as the US around how they are going to contain it effectively and what that would mean for the economy. So there's a vast amount of unknowns at the moment which the market is reacting to. As the unknowns become knowns you will see a stability return and again opportunities will present themselves.
"But noone really knows when exactly that's going to happen."
Seema Shah, chief strategist
Principal Global Investors
“The US Federal Reserve finally stepped up to the plate today (March 12), recognising the desperate need for aid from several parts of capital markets. By expanding its balance sheet significantly, injecting over $1.5 trillion into short-term funding markets, the Fed is acting aggressively to prevent a liquidity crisis from taking hold of the global financial system – a fear that had been driving equity markets lower and credit spreads wider.
The relief has been immediate, with stocks paring their losses as investors stop their indiscriminate selling. It remains to be seen how long risk assets will continue to be supported against a backdrop of global quarantines, travel bans, and spreading infection. But the Fed has certainly fulfilled its role of lender of last resort for markets today, injecting not just funds, but reassurance that someone is watching over them.”
“Meanwhile the European Central Bank made a powerful move by introducing a new targeted lending operation (TLTRO) at a rate below the deposit rate. It is paying banks to borrow from the ECB and, in turn, encouraging banks to pay businesses to borrow from them– essentially offering banks the option of indulging in a kind of carry trade.
Many investors may focus on the fact that the ECB chose not to lower interest rates. But negative rates have been widely considered not just ineffective, but even counterproductive
"This should strongly encourage banks to lend to SMEs, the part of the economy which is most vulnerable to the Covid-19 shock. This way, banks and borrowers should both benefit – a potentially very potent policy tool which speaks to the innovation that we have always suspected lies in the ECB’s capabilities. Of course, many investors may focus on the fact that the ECB chose not to lower interest rates. But negative rates have been widely considered not just ineffective, but even counterproductive, so lowering them would simply have put more unnecessary pressure on banks. The ECB has played its part, now it’s time for the governments.”
Matthew Dibb, co-founder and COO
Stack (a bitcoin fund provider)
"Overnight we saw one of the largest unwinds of long and leveraged positions for cryptocurrencies in the last three years. Bitcoin and the remainder of the cryptocurrency market showed a high correlation in market sentiment to that of the equities sell-off following President Donald Trump’s speech on the travel ban. Market losses across the major currencies are approximately 40% over the last 24 hours.
Market losses across the major currencies are approximately 40% over the last 24 hours
"During the panic sell-off, we witnessed over $700 million of long-short liquidations that occurred on BitMEX, the largest crypto derivatives exchange. We believe this to be a long-squeeze, a direct result of an over-leveraged market.
"We have seen funding levels on XBT futures turn highly negative today at -50 basis points (normally at 3bp), where sellers are borrowing hard to short the market. Futures also entered backwardation, with basis between spot and futures spiking to -10%.
Investors are liquidating alternative assets such as gold and cryptocurrency to meet market obligations and build cash-reserves, a similar theme to that which occurred during the last financial crisis. Our expectation is that a further sell-off in the S&P 500 index future contracts will likely lead to additional downside in the cryptocurrency market and lower liquidity for spot trading and derivatives instruments."
Mark Haefele, chief investment officer
UBS Global Wealth Management
"In our base case, in which the virus remains under control in China and is brought under control in developed markets in the second quarter, we expect markets to end the year sharply higher than today's levels. But a sustained rally will likely require: 1) evidence of successful virus containment in developed markets; 2) clarity on the net economic impact; and 3) a concerted global policy response.
"In the absence of these factors, and amid high levels of volatility, it is clearly possible that markets could trade at lower levels from here in the coming days or weeks.
The best advice for investors is still to stick to their asset allocation strategy with its periodic rebalancing
"The best advice for investors is still to stick to their asset allocation strategy with its periodic rebalancing. However, investors who feel they want a more conservative allocation can consider the following strategies:
"Ensure you have adequate exposure to high-quality bonds, which have proven their worth as a portfolio hedge in recent weeks, and consider shifting capital to dynamic asset allocation strategies that can be defensively positioned in such markets, but also add equity exposure when conditions improve.
"Consider exposure to gold, which has also shown value as a hedge, only down 2.4% during the S&P 500's drawdown.
"Ensure you have sufficient liquidity, including credit lines, to meet short-term cash-flow needs. This reduces the risk that investors are forced to sell assets into volatile and illiquid markets, should the crisis persist.
"Geographic diversification is also a key part of mitigating potential risks.
Tai Hui, chief Asia market strategist
JP Morgan Asset Management
“The US stock market correction in the past two to three weeks is consistent with investors pricing in a recession in the US economy. We do expect US GDP growth in the second quarter to take a severe hit and contract due to social distancing, and cut back in consumption and business spending. This is also reflected by corporate credit spreads in the US, especially in high yield markets.
"Risks include whether the outbreak can come under control in a timely manner in the US and in Europe. Central banks have been quick to act, both in cutting rates and providing liquidity to the financial system and real economy. However, rate cuts are not the most effective tools to deal with the economic fallout of a sudden stop in economic activity from the virus.
The virus spread has far outpaced the typical reaction time by governments in devising new policies to deal with a largely unprecedented economic and social event
"Governments will need to accelerate their fiscal support, especially on implementation, to limit the negative impact on businesses and low income families. Some economies, such as China, Singapore and a number of Asian economies, have been prompt in providing economic support. But the virus spread has far outpaced the typical reaction time by governments in devising new policies to deal with a largely unprecedented economic and social event. Government bureaucracy simply has not kept pace with the nature of the outbreak and market expectations.
"Investors may be asking, is it time to get back into stocks? Market sentiment will remain jittery in the near term as the Covid-19 outbreak continues to accelerate in the US and Europe. As we have experienced in China and other parts of Asia, the right policies to contain the outbreak should work but this involves some sharp, short term pain. We are likely to go through such pain in the weeks ahead in the US and Europe.
"For markets to be less anxious, we need to see the number of new infections stabilise, as we did with China (since mid-February) and South Korea (in recent days). We also need to see fiscal and monetary policy support implementation. Hence, we are not looking at specific time or valuation to advise investors to add back equities, but instead we are looking for the right conditions.”