Global Asset Allocation: The View From The UK: April Insights
Cushioning the Blow
Pledges of fiscal spending have been quick to follow actions taken by major central banks to combat the looming impacts of the coronavirus pandemic. G‑20 countries have pledged more than USD 5 trillion in stimulus through a wide range of avenues to stave off the effects on the global economy. The U.S. has passed a record‑setting USD 2 trillion stimulus package, nearly 10% of its gross domestic product, that includes checks paid directly to families as well as loans and guarantees to impacted sectors, including airlines, hotels, and hospitals. Other major countries have followed suit, with a similar emphasis of broad support to both workers and businesses, large and small. While the measures thus far have been quick to be enacted, their effects will take months to come through and positively impact the economy. Only time will tell if these efforts will be enough to offset the damage thus far. The longer the pandemic keeps the global economy on pause, the more support it is going to need to bounce back.
How Low Can It Go?
Oil prices slid more than 60% in the first quarter, while many oil stocks have lost more than half their value. If the demand‑destructing impacts of the coronavirus‑related shutdowns were not bad enough, already oversupplied markets were challenged by the market share war between Saudi Arabia and Russia, which is now showing signs of healing. While the steep decline in oil prices has resulted in low fuel prices not seen in decades, with current social distancing measures in place, consumers and airlines are unable to take advantage of the low levels. With prices near USD 20 per barrel, many producers are operating well below their break‑even levels, notably U.S. shale producers that continue to operate to generate cash flow despite the low levels. The rising risk is evident in the U.S. high yield market—with approximately a 10% exposure to energy—as yields have blown out to more than 10%. While the battle between OPEC+ members may be resolved, lingering structural imbalances and the severity of the economic downturn will further weigh on the sector.
Emergency Plumbing Fix
As markets faced sharp declines in response to the coronavirus outbreak, liquidity strains in bond markets exacerbated the situation as investors flocking out of bonds were unable to find buyers in the open market and were forced to sell at unattractive levels. Some of this issue can be attributed to dispersed traders and the sheer magnitude of the outflows coming from bonds, but the crux of the issue lies with the enhanced regulations placed on banks after the global financial crisis–limiting banks’ ability to leverage their balance sheets—leaving fewer buyers to step in. In response to the looming liquidity crisis, the Fed swiftly injected a massive amount of liquidity into markets, including unlimited, open‑ended quantitative easing as well as corporate and municipal government bond‑buying, hoping to instill a floor in bond pricing. For now, the extreme measures appear to be alleviating some of the pain as credit markets have shown signs of stabilization. However, it remains to be seen if these measures will be enough to get markets through this crisis; otherwise, the Fed may need to show what they meant by “whatever it takes.”
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Sources: Bloomberg Finance L.P. and FactSet. Financial data and analytics provider FactSet. Copyright 2020 FactSet. All Rights Reserved.
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