Macro & Politics: Covid-19 cracks the world economy
The 1st quarter of 2020 will go into history books as we currently experience things that never happened before: billions of people are confined at home, not being allowed to move or gather freely. The virus as put the world economy on shock, unemployment figures are skyrocketing and many industries are in complete standstill.
The scope of the consequences is difficult to grasp, as we still don’t have a clear picture, as we write, of the length of the necessary confinement measures.
Central banks take unprecedented measures in order to pop-up the economy.
The amount of liquidity created by the Fed and other central banks is mind wobbling. With the specter of an economic recession looming, the Fed preemptively cut its interest rates by 150bps (cumulative) in March to a range of 0%-0.25%.It also officially restarted its asset purchase program and pledged to purchase unlimited amounts of Treasury and mortgage-based securities as well as corporate bonds indicating unlimited Quantitative Easing (QE).
We believe all these measures will allow the economy to recover whenever the current epidemic will fade away. A U-shaped recovery is our main scenario with a rebound starting at the end of 2020.
Markets & Investment decisions: intense activity in our Fund
Beware of credit markets.
Recent market returns are probably the worst ever when it comes to volatility, magnitude and pace. The wash out impacted almost all asset classes with major Equity indexes down approx. 30% since their recent peaks and 25% YTD. More worrisome were credit market behaviors with exploding spreads, no liquidity and obviously sharp declines. Despite recent monetary measures, bond markets remain inefficient and under stress. And the coming downgrades and dividend cuts will not help in the short to medium term. It is essential to avoid possible defaults.
Aulien’s performance YTD -8.75%.
The sudden Corona crisis has forced many changes in our asset allocation and in our investment picks. We started the month by reducing exposure to
duration and some lower rated bonds such as Intrum, Renault Finance and Air France. We didn’t expect such a rapid deterioration and have suffered on some of the positions, essentially our bond funds even though our exposure was primarily to low duration and loans. We continue to seek for opportunities in order to switch some positions from uncomfortable sectors to names we feel more at ease. We recently took a loss on a Ford Bond in order to switch into EDF (utilities seem to be better prepared to face a prolonged standstill).
On the Equity part, we were happy to hold some cash from previous sales in February. We managed to buy after a juicy correction shares in sectors we feel will prevail and or even benefit from the current environment such as Deutsche Post, Kinnevik (e-commerce and media), Tencent (Chinese on-line
giant) , Evolution Gaming and Leo Vegas (on line casino games) and Veolia Environment (cash flow is essential). We sold our position in BAE as well as half our positions in Axa (we want to reduce our Beta) and Elekta.
The current challenges will eventually be met and the world will recover from its current woes. Facing volatility and sharp drops is always hard and difficult but these markets also offer great opportunities for disciplined, patient and courageous investors.
We take this opportunity to thank all of you for your very much appreciated trust and please keep yourselves and family safe.