Sharing our convictions

A different kind of playbook is required in this unique environment. It is near impossible to accurately predict 2020 earnings growth. But companies with strong balance sheets, namely those with superior liquidity, should possess the survivability required to prosper and bridge the gap during the next 6- to 9 months.

3 steps to help navigate the storm: recognize change, keep an eye on your horizon, and get ahead of structural shifts that will follow the shock of death and economic damage. How we frame the crisis in terms of capital preservation and recovery will affect investment decisions.

After a considerable period of zero activity new issue bond markets have reopened this week with a flurry of deals in the US and now in Europe. As usual it has been frequent high quality borrowers reopening the marketplace, and they have done so with confidence from their syndicate bankers that attractive pricing will result in successful transactions.

Clearly this shock/stress test is a severe scenario, but given the uncertainties that COVID-19 has thrown our way, as debt investors we would rather be overly conservative.

Some of the panic selling has also abated as investors are gradually building their cash piles to desirable levels. However, we are still a long way away from normal bond markets.

Yesterday we blogged on how European HY had always led recoveries in UK equities this century, and that even more so this time around we expect the same to happen.

With markets in turmoil and economies around the world shutting down to slow the spread of COVID-19, many investors have been looking to the US to lead the stimulus effort on both the monetary and fiscal policy front. This week they may have got it.

In the case of Aareal Bank the management decision is understandable in our view; should the market panic and begin to offer extended AT1 bonds at a heavy discount, then investors could see this as a real opportunity over the medium term.

In the last two weeks we have seen savage falls in risk assets, but with the unprecedented stimulus and support action taken by policymakers globally, many investors’ minds have inevitably turned to when risk assets might be a buy again. More specifically, given equities are higher beta assets in multi-asset portfolios, when should asset allocators be buying equities again?

As the coronavirus has evolved into a pandemic, our Chief Operating Officer gives an update in addition to the initial business continuity information we provided on March 3, 2020.

For participants in financial markets a liquidity squeeze that lasts for a prolonged period is one of the most difficult environments to cope with. Correlations break down, markets trade in a vacuum, small trades lead to disproportionate price moves, relative value goes out of the window, panic sets in, selling is indiscriminate. This is where we have been for the last two weeks. So we thought we would share some of these experiences with you and try to rationalise why it is happening and when it might end.

In recent weeks we’ve seen significant sell-offs across all asset classes as investors have been scrambling for liquidity. With most of Europe and the US effectively in lockdown, a recession looks to be inevitable and the question is what this will do to corporates’ ability to service and refinance their outstanding debt, especially for those in the sub-investment grade space.