In the eye of a global economic storm

Trafalgar Square

As governments impose travel bans, schools and museums close down, countries go into lockdown and London’s Trafalgar Square is eerily quiet, it’s safe to say that the global economy is in the eye of the storm.

Equity markets saw their worst day since the Black Monday crash in October 1987 yesterday, with UK and US equities down close to 10 per cent.

Many economists agree that recent developments will likely move the world into a global recession. According to wealth manager Kingswood, history would guide us to expect market declines no greater than the 25-30 per cent drop already seen in this environment if this was to happen.

“There are of course notable exceptions: the bursting of the technology bubble in 2000, and the global financial crisis, saw equity declines of around 50 per cent. We are certainly not expecting a re-run of these events,” said Rupert Thompson, chief investment officer at Kingswood.

"We still expect any global recession to be relatively short-lived. The combination of containment measures and monetary and fiscal stimulus are expected to lead to activity picking up again later in the year,” he added.

Meanwhile, markets might not have necessarily bottomed yet, in Thompson’s view. “Bear markets typically last considerably longer than three weeks. Even so, if the recession is relatively short-lived, then equities will very likely have recovered a good part of their losses by this time next year,” he commented.

He went on to say that markets tend to recover quickly. “We had a neutral weighting for equities going into the sell-off but the recent market falls have now left us underweight. Given the size of the market declines, our views above, and our medium to long-term horizon, we believe it makes sense now to rebalance equity allocations back to this position,” explained Thompson.
While employees are returning to their work places in China and the situation in the country is slowly returning back to normal, its government is rolling out a policy response which will have consequences for both the Chinese economy and investors. China's government has been a first mover and unleashed a wave of policy support measures in February and March. Among other measures, funding channels have been opened so credit gets into the economy, and quickly.
Hayden Briscoe, UBS Asset Management’s head of Asia Pacific fixed income and UBS’s expert on the ground, is of the view that default risks have subsided in China, just as they have risen elsewhere around the world; and that China and Asian high yield bonds offer an attractive option to investors in a world starved of yield.
“China's economy still faces many challenges and we expect weak official statistics for 1Q20. However, we believe the government moves indicate a big reduction in default risks in China, and potentially for the next twelve months,” said Briscoe.
“So for investors struggling in a world of not just low yields but also a huge USD 14 trillion of negative yielding debt, we feel that the Asian high yield market currently looks attractive. We believe the strong relative value on offer compared to US and European high yield, make for an attractive solution for yield-and-income hungry investors right now,” he added.