Economic Commentary – Apr 2020

April 9th, 2020, by Chris Davis

From a distance

As we all adjust to new ways of living and working, the spread of the Covid-19 has impacted people’s health, businesses and markets around the globe. The scale and reach of the virus is unprecedented and it is obvious that no country/government was fully prepared for this eventuality.
The social distancing measures in place have altered normal life causing whole sectors of the global economy stop, in particular the hospitality and leisure sector. In the UK large hotel chains are not taking any bookings until June at the earliest, shops are closed and leisure facilities lay dormant.

Impact

The speed of decline in markets has been unprecedented. The S&P500 took only 16 trading days to fall 20%. During the Great Depression of 1929 it took 30 days to fall 20% and in the Great Financial Crisis it took 188 trading days to fall this far. The S&P500 has fallen 30% on 8 previous occasions. It has taken the S&P500 only 22 trading days to fall 30% this year. The next closest in terms of time was in the Great Depression when it took 31 trading days.
Covid-19 is having a huge impact on the credit market. Fund managers whose investment objectives only allow them to invest in investment grade corporate debt are having to sell bonds into a falling market. According to Deutsche Bank $90 billion of corporate bonds were de-rated to ‘Junk’ in March. Index providers have taken out the likes of Ford and Macy’s from their investment grade indices. Carnival, the cruise line holiday operator came to the bond market looking to raise $6 billion, whilst offering a 12% yield. Ratings agencies are downgrading the credit worthiness of many businesses, but Carnival is still currently considered investment grade and the bond was oversubscribed. As recently as October last year Carnival was able to raise $600 million for a 10 year bond paying 1%.
Oil majors have raised $32billion in debt over the past weeks. The drop in the Brent Crude oil price in the month from $53 (per barrel) fell to $21.7 (per barrel) a price last seen in 2003. With the world on lockdown, demand for oil has collapsed exacerbated by Saudi Arabia and Russia increasing supply.

Selling in the first 3 weeks of March was quite indiscriminate. The panic in the market meant that defensive stocks fell alongside cyclicals. Some company share prices will have fallen more than their prospects would warrant and those that were more sensitive to the crisis fell recipitously. We spoke to all of our key fund managers and a common theme was their focus on ensuring that the balance sheet and cash flow resilience was in place.
Some were taking the opportunity to add new names into their portfolios as the market dislocation had provided opportunities at prices not seen in a while…..

Chris Davis
Chief Investment Officer

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