Insights


COVID-19 left, right, centre - where can investors go?

16 March 2020

It would be difficult to capture the extraordinary events of the past week in few words, but here’s a summary.

The catalyst was the OPEC+ outcome, which sent the energy market into a tailspin and spilled over to all segments of financial markets. We saw rapid falls in equities, incredible volatility in bond markets, a stunning lack of coordination relating to COVID-19, poor communication from authorities (both political and monetary) and a sense of utter panic on Thursday.

The results? The S&P 500 fell -9.5%, European bourses fell more than 10% and European, non-German yields went through the roof, with Italian 10-year BTPs yield up 65bps in the few hours following the ECB comments.

We could almost be forgiven for forgetting that some sizeable fiscal packages have been announced.

  • The US has already signed an emergency spending bill of $7.8 billion, while also planning additional spending and deferring tax payments for individuals and businesses; the latter two measures could be worth an upwards of $200 billion. 
  • Italy has said it is willing to spend as much as €25 billion.
  • The UK Budget saw the Chancellor deploying an additional £30 billion of spending.

On the monetary front, the ECB announced €120 billion of additional bond purchases and a further TLTRO to support credit in the EA. The Fed announced extraordinary repo measures, which amount to $1 trillion per week for the remainder of March. The BOE made a 50bps emergency cut in rates and provided incentives to lend. The BOJ stepped into the repo markets, as did the Bank of Korea, to help liquidity.

Meanwhile, on Sunday 15 March, the Fed slashed rates to zero and announced a $700 billion asset purchase package seeking to provide liquidity and assuage markets. Markets did not react positively, however, and risks of whipsaw moves continue to abound.

Bond volatility, in particular, has been extreme. The fall in the 30-year US Treasury yield was on a par with 2008 moves and, on some days, even greater.
 


30-Year US Treasury Yields


Source: Bloomberg Finance L.P., as of 13 March 2020. Past performance is not an indication of future performance.

Go global and neutral with Global Agg and ACWI or hide in a safe place with T-Bills

When it comes to portfolio allocations, ETFs have helped many investors re-position. Given the wide gyrations during the week in equity and rates markets, neutrality is a reasonable approach to adopt. Just as COVID-19 has no borders, neither do markets.

It remains too soon, in our opinion, for high conviction views on one segment versus another, given how fluid the situation remains. For all the support they can give an economy, fiscal and monetary measures cannot do much against the virus itself. Coordination around health management will help but seems somewhat lacking at an international level at present.

At some point, economic data will be written off and the eventual curbing of the COVID-19 cases of infection and deaths may provide a trigger for market participants to become more active and deploy their dry powder. The second derivative of the number of cases is important; flattening that curve is crucial.

In the meantime, we see advantages to keeping exposure neutral through any of the following:

  • Global Aggregate: Global government exposure, a positive yield and the potential to capture spread tightening. While duration is 7.0, yields may remain low  over coming weeks as the dust settles and before a U- or V-shaped recovery takes place. Click here to learn more about the SPDR Bloomberg Barclays Global Aggregate Bond UCITS ETF, including historical performance and hedging options.
  • MSCI ACWI: Global equities, including EM, can allow investors to position for a rebound without any overweights. Click here to learn more about SPDR MSCI ACWI UCITS ETF, including historical performance and information on hedging.
  • T-Bills: Safety first with no interest rate risk. A tactic of keeping one’s powder dry should the Friday rebound prove ephemeral. Alternatively, it is a defensive strategy if economic data look abysmal and cases rise quickly given the exponential nature of COVID-19 contagion. Click here to learn more about SPDR Bloomberg Barclays 1-3 Month T-Bill UCITS ETF, including historical performance.
     

Fund Details


Source: State Street Global Advisors, S&P Dow Jones Indices LLC, as of 13 March 2020. Characteristics are as of the date indicated and should not be relied upon as current thereafter.


Flows


European-Domiciled ETP Segment Flows (Top/Bottom 5, $mn)

European-Domiciled ETP Asset Category Flows ($mn)

Sources: Bloomberg Finance L.P., for the period  5 March– 12 March 2020. Flows are as of date indicated and should not be relied upon as current thereafter


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