Investment Clock insights

Coronavirus views 3 April 2020 - update on multi asset funds


Nersen Pillay

3 April 2020

Stock markets bounced sharply last week, after a violent sell-off earlier in March, with more optimism on counter measures to mitigate coronavirus related damage to the global economy, after the USA has approved a $2 trillion dollar package; however, markets have seen more volatility and weakness this week as uncertainty over both the depth and duration of the health and economic crisis remains high.
In the Global Multi Asset Portfolios (GMAPs), with market uncertainty and volatility still high, we have moved to be broadly neutral in equities but have not gone underweight as US and European public health experts are beginning to talk of some hope regarding the virus impact peaking which may lead to lockdowns being eased; also a broad range of monetary and fiscal stimulus measures have been announced which will significantly help growth once restrictions on activity can be eased. We remain slightly overweight US equities (including the tech sector) given the relatively defensive nature of the market; we are also moderately overweight emerging markets, potentially a safer haven as the virus appears to be under control in China. We are underweight UK equities, a long-term underperformer hampered by a heavy resource sector weighting. We remain overweight high yield bonds, particularly short duration high yield, as we expect the asset class to be resilient over the medium term. We remain broadly neutral on UK commercial property where we have seen diversification benefits relative to equities. We have de-risked our currency positions, remaining short the economically-exposed Australian dollar and more recently moving short sterling while shifting in favour of the more defensive US dollar and Japanese yen.
In the Multi Asset Strategies Fund (MAST) - which is more focussed on capital preservation, with a cash +4% objective and a volatility capping strategy – we have de-risked rapidly, reducing the core portfolio’s exposure to equities by about two thirds; this is a greater level of de-risking than our systematic approach would have applied during the 2008 Lehman failure. Meanwhile, we reduced our tactical position in equities to be broadly neutral given the uncertain market outlook. In aggregate we cut target equity exposure in MAST from around 45% at the market highs to around 10% today. When volatility and uncertainty reduce in markets, MAST will also be capable of being rapid in taking on risk.
Macro and market outlook
We may not yet have seen the lowest point in equity markets as the virus is spreading rapidly in the US and Europe with volatility remaining high. Sustained recovery in markets will probably have to wait until there is more confidence on the virus being under control globally, shuttered parts of the world economy are re-opened and consumer confidence rises from its lows as people are allowed to return to work. We expect our Investment Clock model to reflect this situation by moving quickly into disinflationary Reflation before moving sharply upwards into Recovery when the crisis ends. We intend to make full use of our active tactical asset allocation risk budget to add to equity exposure when we judge the time is right.
Our investment process has weathered difficult markets in the past and we added significant value over the 2007-9 Global Financial Crisis. We believe a disciplined and active approach to both risk control and tactical asset allocation will be crucial in portfolios, as markets respond to the current crisis and policy responses being implemented.

Stock markets bounced sharply last week, after a violent sell-off earlier in March, with more optimism on counter measures to mitigate coronavirus related damage to the global economy, after the USA has approved a $2 trillion dollar package; however, markets have seen more volatility and weakness this week as uncertainty over both the depth and duration of the health and economic crisis remains high.

In the Global Multi Asset Portfolios (GMAPs), with market uncertainty and volatility still high, we have moved to be broadly neutral in equities but have not gone underweight as US and European public health experts are beginning to talk of some hope regarding the virus impact peaking which may lead to lockdowns being eased; also a broad range of monetary and fiscal stimulus measures have been announced which will significantly help growth once restrictions on activity can be eased. We remain slightly overweight US equities (including the tech sector) given the relatively defensive nature of the market; we are also moderately overweight emerging markets, potentially a safer haven as the virus appears to be under control in China. We are underweight UK equities, a long-term underperformer hampered by a heavy resource sector weighting. We remain overweight high yield bonds, particularly short duration high yield, as we expect the asset class to be resilient over the medium term. We remain broadly neutral on UK commercial property where we have seen diversification benefits relative to equities. We have de-risked our currency positions, remaining short the economically-exposed Australian dollar and more recently moving short sterling while shifting in favour of the more defensive US dollar and Japanese yen.

In the Multi Asset Strategies Fund (MAST) - which is more focussed on capital preservation, with a cash +4% objective and a volatility capping strategy – we have de-risked rapidly, reducing the core portfolio’s exposure to equities by about two thirds; this is a greater level of de-risking than our systematic approach would have applied during the 2008 Lehman failure. Meanwhile, we reduced our tactical position in equities to be broadly neutral given the uncertain market outlook. In aggregate we cut target equity exposure in MAST from around 45% at the market highs to around 10% today. When volatility and uncertainty reduce in markets, MAST will also be capable of being rapid in taking on risk.

Macro and market outlook

We may not yet have seen the lowest point in equity markets as the virus is spreading rapidly in the US and Europe with volatility remaining high. Sustained recovery in markets will probably have to wait until there is more confidence on the virus being under control globally, shuttered parts of the world economy are re-opened and consumer confidence rises from its lows as people are allowed to return to work. We expect our Investment Clock model to reflect this situation by moving quickly into disinflationary Reflation before moving sharply upwards into Recovery when the crisis ends. We intend to make full use of our active tactical asset allocation risk budget to add to equity exposure when we judge the time is right.

Our investment process has weathered difficult markets in the past and we added significant value over the 2007-9 Global Financial Crisis. We believe a disciplined and active approach to both risk control and tactical asset allocation will be crucial in portfolios, as markets respond to the current crisis and policy responses being implemented.

For professional clients only, not suitable for retail investors. Please note that this is a fast moving environment and markets and impacts on portfolios are changing. Opinions contained in this blog post are represent views of the author at time of writing. Past performance is not a reliable indicator of future results. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice. Portfolio holdings are subject to change, for information only and are not investment recommendations.