Private View Blog: Coronavirus - why investors should hold their nerve

The spike in volatility triggered by fears over the rapid spread of Covid-19 outside China, having now been detected in more than 80 countries, has torn US and European stockmarkets down from record highs and spooked investors.

Yet, investment strategists at private banks remain constructive on the market. They tend to see these large scale epidemics as transitory, 'tail' events.

Stay invested

Emergency monetary and fiscal easing measures, which have contributed to the temporary rebound of markets after the brutal sell-off last week, the worst for risk assets since the financial crisis, are expected to mitigate the negative impact of the outbreak on economic growth. Investors should hold their nerve and stay invested, and potentially add risk to their portfolios.

More than 40 per cent of private banks entered the year with an overweight exposure to equities, according to PWM’s fifth annual Global Asset Tracker survey, conducted in January. Almost 70 per cent expected client allocation to stocks to increase this year, with equity markets supported by moderate economic growth and accommodative central banks policy.

But over the past few weeks, global panic has forced authorities to take unprecedented, draconian measures, including travel bans, movement restrictions, quarantines, school and public space closures, transforming lively and crowded cities into ghost towns, in a drastic bid to halt the spread of the deadly coronavirus.

The epidemic has affected the economy on both the supply side, with factory closures, cutbacks in service provisions and supply chain disruption, as well as the demand side, hitting business and tourism travel, education and entertainment services and consumer confidence. The OECD downgraded its central growth forecast by 0.5 per cent to 2.4 per cent, warning that a “longer-lasting and more intensive coronavirus outbreak” could halve growth to 1.5 per cent in 2020.

The timing and shape of the outbreak remain unknown, with the worst case scenario for the economy believed to be linked to the persistence of harsh containment measures and prolonged consumer and business fears in a broad range of countries.

As you were

Yet, although a few private banks have taken measures to better protect client portfolios by adding exposure to safe haven assets such as gold or the Japanese yen, asset allocation recommendations have remained mostly unchanged relative to the beginning of the year. After all, the goal of a well diversified portfolio is to be resilient in tough times. 

“We always recommend to look at longer term investment goals and less on volatile short term outlooks that can be overly skewed by tail events like these,” says Mohammad Kamal Syed, head of asset management at UK private bank Coutts.

In significantly stressful periods, as defined by a 15 per cent drawdown in global equities, “goals-driven clients” should utilise the portfolio reserve of high quality fixed income and cash to fund goals, explains Northern Trust Wealth Management CIO Katie Nixon.

The economic effect of Covid-19 is transitory and offsetting monetary and fiscal policy could prove to be powerful in driving a rebound through the balance of the year, believes Kiran Ganesh, investment strategist, CIO at UBS GWM.

UBS remains overweight equities, expecting emerging market stocks to continue to outperform developed markets, as seen in recent days, also thanks to China’s relative success in containing the virus, while uncertainty in developed markets remains high. Also, EMs benefit from lower valuations and expected higher earnings growth compared to developed markets. The Fed's surprise 50 bps rate cut in March, along with a weaker dollar, could also provide a tailwind for EM equities.

The recent sell-off in equities, says UBS, offers investors opportunities to enter longer-term investment themes, such as digital transformation and genetic technologies, at lower prices, with the outbreak likely to accelerate some of the key secular trends driving markets in the coming decade.

The Covid-19 experience may lead companies and consumers to increasingly use technology to limit unnecessary travel, ventures Willem Sels, chief market strategist for HSBC Private Banking, explaining the bank’s bullish position on the telecoms sector. The travel and tourism sectors will however benefit from rapid growth of emerging middle classes, to some extent offsetting this trend. “Quality assets” will enjoy the most sustainable recovery, as global growth will remain below normal, even when Covid-19 cases stabilise, he believes.

There are several reasons why investors should continue to gain exposure to risk assets, says Hou Wey Fook, CIO at DBS Bank in Singapore. Data show that new infections may have peaked in China, which supports the re-opening of factories and the reduction in supply chain bottlenecks, he states, in contrast with some analysts warning about risks from Chinese people returning to work and cases of virus imported from other countries, which could result in another peak of Covid-29 in China.

The impact on demand will be limited, as consumption is postponed and momentum will rebound during the second half as a result of pent-up demand. “This crisis is purely a transitory event that will fade away when the weather gets warmer, this is our base-case assumption”, says Mr Hou.

Moreover, a co-ordinated global central bank action is on the cards, mitigating the downside macro risks. Risk assets’ valuations are back to “reasonable levels” after correction and a widening gap between equity earnings and bond yields has strengthened the case for equities. Currently the yield gap stands at 3.8 per cent, and is back to levels last seen in 2016. With the US Treasury 10-year yield languishing at 1.16 per cent, asset allocators will eventually be compelled to switch out of expensive bonds into equities.

Yet, clients have been adding to bond and multi-asset income allocation and not to risk assets. “We have seen limited signs of people looking at the recent equity market sell-off as an opportunity to buy just yet,” reports Steve Brice, chief investment strategist at Standard Chartered Private Bank. If clients are already fully invested, they should remain so. If they are looking for opportunities to increase their exposure, they should wait for signs that Covid-19 new cases are peaking outside of China, particularly in the US and Europe. This is usually a good signal that pessimism should wane and markets should recover, he states.

Time is a key variable, and the speed and range of policy responses are crucial. But neither fiscal nor monetary policies can address a fall in consumption demand and time is needed before the cycle can return to normal, warns Alexandre Tavazzi, head of Pictet Wealth Management CIO Office and global strategist. A U-shaped recovery is more likely than a V-shaped one.

For risk-seeking investors, the rise in volatility and the fall in many asset prices are creating new opportunities, as valuations have become more attractive, he adds. “But so far, we have refrained from adding risk assets to our portfolios as the situation remains very fluid.”

As the economic impact from the spread of the coronavirus deepens, comments from cautiously optimistic wealth managers should not surprise. Taking a long-term view of markets is what they have always recommended, even in the midst of the global financial crisis. Only time will tell whether what might turn into a large scale lockdown will trigger a global recession or just a short-term economic downturn. 

Elisa Trovato is deputy editor of Professional Wealth Management. Follow her on Twitter  @elisa_trovato 

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