Investment Perspectives 2020 | Mid-Year Review & Outlook

Executive Summary

The economy has been hit by a “black swan” event

The first half of 2020 has been a most extraordinary period as the global economy was temporarily brought to a standstill. Governments took unprecedented lockdown measures to limit the spreading of the Covid-19 coronavirus and this pandemic represents a “black swan”, defined as an unpredictable event with potentially devastating consequences. The global economy is currently going through a recession, which should prove to be extremely severe but also extremely short. Global GDP is expected to contract by around 5% in 2020 compared to projections of 3% growth before the Covid-19 shock, with a strong rebound expected from a 2020 Q2 trough into 2021.

A war-like effort from monetary and fiscal authorities to fight the Covid-19 pandemic

The responses of the central banks and governments to limit the economic damage from the pandemic were extremely quick and on a scale never observed previously. The main central banks deployed the full range of their crisis tools within weeks. The US Fed funds rate was slashed to zero, massive quantitative easing was reintroduced and a broad range of additional measures were taken; these significant interventions contributed to improve the functioning of markets which had been under acute stress in March. Governments also acted promptly and decisively. Between early February and early April, G20 governments announced nearly 8 percent of 2019 G20 GDP in fiscal support, with this percentage now exceeding 10% following the addition of new plans. Global fiscal packages are estimated to be worth around $9 trillion, with the G20 economies accounting for the bulk of this amount: $8 trillion .

Equity markets have moved in both directions at record speeds

Financial markets went into a tailspin in February after having ignored the Covid-19 risks for some time. Equity markets plunged by over 30% in a matter of weeks as investors came to terms with the devastating impact of the pandemic on the world economy. The market correction was amplifed by the unwinding of a high level of leverage and all asset classes were caught up in the turmoil during a brief period in March. Equity markets then rebounded at a pace never seen before during equity recoveries following a bear market; this rally has been driven by the drastic measures taken by central banks and governments. Financial conditions are now very supportive for capital markets but question marks over the sustainability of the rally of equities remain. There is also a distinct risk that markets have become far too reliant on all these supports, in view of weaker economic fundamentals.

We maintain portfolio hedging in view of elevated uncertainty

Thanks to our quick hedging we did not have to sell positions. We were thus able to hold onto our long term convictions and our option protection strategy greatly reduced the volatility of portfolios. We recognize that markets are being driven by a huge wave of monetary and fiscal support, but we believe that they are not taking account of a number of risks which could ultimately have a significant impact. That explains why we hold a neutral equity exposure combined with a put spread to limit the potential downside risk; in an environment fraught with uncertainty and in view of expensive valuations, we consider the management of portfolio risk as paramount. In the next section of the document, we will evaluate the macro environment and the prevailing financial conditions by highlighting several key indicators that we observe. Following a brief overview of the first half returns of the different asset classes, we will outline our current market outlook and asset allocation.


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