Coronavirus Q&A: What next for investors?
Our experts discuss the pandemic’s effect on financial markets and the wider world.
2 min read
Our latest client call – Coronavirus and Markets: Navigating the New Normal – covered the key issues on investors’ minds right now. From market moves to negative interest rates, from responsible investing to COVID-19 vaccines, the call’s topics shone a light on investor thinking as the world bumps further along into recovery mode. Clients also had the chance to put their questions to our experts.
Here’s a summary of the key themes. Please note that the opinions you’re about to read do not constitute investment advice.
What’s the current state of markets?
Sven Balzer, Head of Investment Strategy: “So far this year we’ve gone through three phases. January and February were relatively calm, then we had the massive correction in March, and then from April we’ve seen recovery across all asset classes, in particular equities and credit.
“That recovery turned out to be quite strong despite a re-acceleration in COVID-19 cases since May, particularly in the US and emerging markets. It almost seems as if the market has ignored this rise in infections over the past two months.
“The main change since March is that investors have a better understanding of the counter-forces to the pandemic. Central banks and governments have stepped in massively and made their intentions of support very clear, the re-opening of economies has happened, and the scientific understanding of the virus is much improved.”
What’s the outlook for investors?
Sven: “If you look at the macro, top down picture such as GDP trends, US housing activity or activity surveys among corporates, you can see that they’ve all risen, some of them surprisingly strongly.
“Also, commodity prices like copper or gasoline have risen, which is usually a good indicator of a turn in the economy, especially for the US and China. Oil prices are also very resilient despite OPEC increasing supply slightly. And the weakening of the dollar is a typical indicator of reflationary trends gaining momentum.
“We expect pull-backs on the way, but based on the favourable technicals of the markets and our own lead indicators, we’re strategically positive for risk assets where, into 2021, we would expect a more broad-based advance in global equities.
“Obviously there’s a fair amount of risk to this outlook. One is a much stronger second wave of COVID-19 than expected, and you also have highly leveraged corporate balance sheets, as well as tensions between the US and China.
“But nevertheless, the monetary and fiscal stimulus, combined with the economic uncertainty we see at the moment, is usually a very powerful combination for future, positive market returns over a 12-month time horizon or longer.”
When might we see a coronavirus vaccine?
Sven: “We currently have three sets of potential vaccines which are starting phase three trials now. All three of them have produced antibodies in the earlier tests – enough for them to count as potential vaccines.
“We could see first results of these phase three trials in November. If these are successful it would go to the regulator, and we think it’ll take roughly one to two months for approval.
“That would take us to the end of this year or early 2021 for when we may have a validated vaccine.”
How has this year’s crisis affected responsible investing?
Leslie Gent, Head of Responsible Investing: “The COVID-19 crisis has been a tipping point for the adoption of responsible investing; moving it from being a niche investment approach to the mainstream.
“Responsible investing means we take into account both financial and non-financial issues when we’re making investment decisions. Non-financial issues, such as environmental and social issues, are the ones that have really been at the centre of the crisis, and have therefore been driving momentum towards this approach.
“When you consider how companies have been responding in the crisis – you ask how are they treating their employees? What sort of health and safety measures have been adopted? What kind of consideration has been given toward paid sick leave? – we believe these are the types of issues that, if managed well, have the potential to enhance the reputation of a company.
“There’s evidence that companies that ‘do good’ – by which I mean they have strong values, a strong culture and a really clear purpose – tend to perform better than companies that don’t have that north star.”
Rebecca Hughes, Head of Financial Sponsors and Executives: “Responsible investing’s not a nice-to-have any more. It’s incredibly important for those companies that we invest in to have really strong ESG (environmental, social and governance) credentials in order for our clients to have long-term sustainability.”
What are the chances of negative interest rates?
Sven: “I don’t think negative interest rates are likely this year. We can’t rule them out for next year to be quite honest, simply because the Bank of England (BoE) has put it on the table now, but I don’t think they’ll use it as a preferred measure quickly. If the UK and EU cannot agree a trade deal before the end of the year – which is not our base case – the BoE may consider negative interest rates at the earliest opportunity.
“I think other options are likely – increased quantitative easing through the buying of government bonds, and potentially other private assets. I think these are options they might explore before they go down to negative rates.”
Rebecca: “If we think about the perfect storm for our clients at the moment, we’ve got inflation at 0.5%, interest rates at 0.1%, which might get even lower, so the value of cash will erode.
“But actually there’s opportunity as well. Clients can think about their plans for the future. Have they considered moving house? Those sorts of things are going to be really important from an interest rate perspective with very, very inexpensive borrowing for the longer term now.”
If you would like more information about how to join future calls like this one, please ask your private banker or wealth manager.
When investing, past performance should not be taken as a guide to future performance. The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your original investment.