Following a day that saw the FTSE 100 close down 7.7% and the two-year gilt yield plunge into negative territory for the first time, multi-asset managers are selectively adding risk rather than going “gung-ho”.
Global stock markets plummeted on Monday after the Kingdom of Saudi Arabia triggered an oil price war by slashing the official selling price per barrel and vowing to increase exports by up to 800,000 barrels a day.
This, coupled with the rapid spread of the coronavirus, led investors to flee risk assets and seek safe havens such as sovereign bonds and gold.
A 7% fall in the S&P 500 in early trading led to a “circuit breaker” being applied which saw dealing suspended for 15 minutes. The index never recovered, however, ending the day 7.6% lower. The FTSE 100 closed down 7.7% – its largest intraday fall since 2008 – while the Stoxx 600 closed down 7.4%.
The two-year gilt yield fell to as low as -0.04% while the 10-year yield dropped to an all-time low of 0.08%. In the US, the yield on 10-year US treasuries hit a new low of 0.318%.
Stocks have not necessarily become cheaper
In an update for clients, Psigma Investment Management chief investment officer Tom Becket (pictured) said while buying the dip is a common strategy, it was unclear whether stocks have become cheaper as the coronavirus continues to spread.
He said this is because of three reasons. First, the ongoing reduction to corporate earnings growth means that valuations might not be as cheap as one might expect as the “E” in the P/E calculation has fallen.
“Indeed, you could easily make the case that equities have become more expensive on a P/E basis as you must adjust the earnings denominator,” said Becket.
Second, he said stock prices are simply falling from all-time highs to levels more realistic from a long-term valuation perspective. Finally, the falls have not been as extreme as they might have been given the potential economic impact and the possible damage to corporate profits.
“Certainly, we haven’t seen the purging of the excesses of en vogue investments like the technology sector yet, although it started to underperform last week, but were that to happen we would start to consider a buying opportunity as being presented.”
Selectively adding credit risk
Becket said Psigma’s attention has been focused on its credit allocations with a small number of managers.
“We know exactly what we own within funds, why we own such instruments and how they are performing,” he said. “Having had calls with each manager last weekend and late the week before last, we have had follow-up conversations in the last few days. So far, the performance of the credit investments has been as we would have expected.
“Given some of the funds were defensively positioned heading into this year, we have been in discussions with the managers to selectively add risk to portfolios, as yields have become more attractive.
“This is not a case of being ‘gung-ho’ but taking a measured approach to increasing risk on very down days.”
‘We would rather be buying than selling’
Janus Henderson head of multi-asset Paul O’Connor said in terms of fixed income, the oil shock has jolted the resilient markets for high-yield debt and emerging market bonds.
“The risk now is that investor redemptions will accelerate at a time when market liquidity is already under pressure,” he said. “Still, the scale of the repricing has been so rapid today that value is already beginning to emerge. Credit markets have gone from being overbought to oversold, overnight.”
O’Connor said the oil shock has only added to the confusion and uncertainty about the nature of the coronavirus, its potential economic impact and the policy response.
“The one thing we do know however is that markets are now in panic mode. While it would be foolish to try to call the bottom in the markets, we would rather be buying in this environment rather than selling. We are gradually rebuilding risk exposures into market weakness.”
Quilter Cheviot chief investment strategist Alan McIntosh said: “Although it is troubling to see share prices falling, it is by no means unusual. Setbacks in markets occur for a variety of reasons and are part and parcel of long-term investment cycles.
“Therefore, it is important to retain perspective and remember that it is more important to stay invested than to attempt to time exit and entry points to markets. Indeed, those with funds available should look to take advantage of recent weakness to gain or add exposure to quality long-term investments. The power of compounding will do the rest.”
