Earlier in the month, we laid out three possible scenarios of how the coronavirus pandemic may impact the global economy:
In the UK, the virus is contained over the coming weeks and lockdown measures are eased. Some countries are already easing various aspects, but this is contingent on the virus remaining stable and social distancing restrictions will remain in place for months to come. Markets should act positively in this scenario.
A failure of public health interventions would lead to a prolonged series of lockdowns. This would continue until we have a vaccine or establish herd immunity. The economic cost would be far greater and would put impossible pressure on many companies where closure would remain as the only option.
Comparisons to the 1918 Spanish flu and the Great Depression are unfair for several reasons. We have more advanced scientific capabilities; much improved social security and the speed and scale of the current fiscal and monetary response is herculean.
Governments understandably err on the cautious side due to concerns about the risk of a second wave of infections.
It is this scenario where we think the balance of probabilities has shifted.
How it is playing out
While some governments are easing restrictions, this is conditional on the virus remaining under control and they are doing so very gradually. Others are extending lockdown periods. This means lower chances of a quick recovery and a bigger hit to growth.
There are possibly also early signs of a second wave. Henan province in China has gone back into lockdown and there are growing number of cases in other Asian and emerging market countries. In many of these countries, the public health systems and fiscal positions are weak, casting doubt on their ability to contain the spread. This means higher chances of ongoing restrictions (especially travel) and greater risk of repeated lockdowns.
Companies are now reporting earnings for Q1 2020. They usually forecast the year ahead but, in many cases, they are removing guidance altogether. They simply have no idea.
Growing uncertainty – reducing risk
This all means that uncertainty is growing, creating downside risks for growth assets (equities). Markets have rallied 15 – 20% from the lows a month ago. We firmly believe this is a good opportunity to sell some growth assets and increase our defensive positioning, including cash in some cases across all portfolio strategies. These are summarised in the tables below:
Overall, we’ve made three significant moves:
- Our allocation to equities has been reduced, with most of it being reallocated to defensive assets including bonds and cash.
- Regionally, we have reduced our UK equity allocation, reflecting our long-term thinking.
- We have increased the average company size, while tilting industry exposures towards defensive sectors from cyclical sectors.
By making these changes, we are looking to preserve the values of your portfolios. Right now, we’d rather you missed out on some gains, if that’s the cost of being better protected.
We are continuing to monitor economic and healthcare data to help guide us. If you have any questions, please contact your usual EQ contact or email email@example.com.