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Coronavirus continues to spread - a bond fund manager’s view

Ariel Bezalel, manager of the Jupiter Strategic Bond and Dynamic Bond funds, shares his thoughts on the continued economic effects of coronavirus and the impact this has had on the stock market so far.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

Coronavirus is dominating daily headlines, causing economic and stock market shockwaves across the globe.

Following on from our latest article on coronavirus and the stock markets, we asked Ariel Bezalel, manager of the Jupiter Strategic Bond and Dynamic Bond funds, for his thoughts. Hargreaves Lansdown may not share his views.

This article isn’t personal advice. If you’re not sure if an investment is right for you, please ask for advice.

What’s the economic reaction been like so far?

Ariel Bezalel told us "Our view is there needs to be a policy response beyond what has been announced so far. Central banks are doing ‘whatever it takes’, but they simply don’t have the tools to address a global supply/demand shock. It doesn’t really matter what the interest rate is if people just aren’t going to shops/restaurants/etc.

Countries around the world are at different stages of the virus outbreak, but those further along won’t necessarily recover more quickly. In China, for example, large corporations are now getting back to work, but for some of them their customers in the US and Europe are just entering lockdown and so demand will stay weak.

So the market is looking for governments to pull fiscal levers, but the problem is that finances are already stretched. The measures announced so far are not enough to combat a huge deflationary shock and, crucially, in the US, political friction could delay the progress of whatever fiscal plans Trump has. We do think that major fiscal action will be taken at some stage, but that it will take much longer than this panicking market wants.

Longer term, we think that people will seriously need to think about ‘financial repression’, which means pinning down yields at very low levels. That’s not the sort of decision that will be taken lightly, but could be the most painless way to pay down debts. That’s one reason we don’t see much scope for yields to rise substantially from here, and it’s something we continue to debate around the desk. Modern Monetary Theory, aka helicopter money, is only a matter of time in our opinion."

How have the markets reacted?

"This is a black swan event that has taken a lot of market participants by surprise, causing an acute re-pricing of risk. Risk assets have rallied on some days, but we see this as a serious risk-off environment. The spread of coronavirus appears to be at an early stage in Europe and the US. The shutdowns already seen in Italy are likely to happen elsewhere.

Markets have reacted badly to the measures announced recently, with credit spreads moving wider and equity markets down. The Fed have gone all in, but instead of feeling reassured the market instead seems to be thinking ‘what do they know that we don’t know’? Also, the market could well be getting concerned that Central Banks are now 'tapped out'."

What has this meant for different sectors?

"’At the end of last week high yield bonds were down around 11% year-to-date, with investment grade down around 2.5%. Those figures will only have fallen further recently. Anything that is economically sensitive has been hit hard, especially those issued by companies related to travel, leisure and energy, as slowing economic growth leads to less demand for oil and people under lockdown stop travelling and stay at home. Oil has been further punished by the inability of OPEC+ to agree to output cuts and in fact has led to the Saudis deciding to ramp up output and play a game of chicken with the Russians. But at the same time wreak havoc on the US energy complex.

Investors have been flocking to so-called safe-haven assets, which is why we have seen such dramatic moves in US Treasury yields, which started the year at 1.95% and tumbled below 0.50% – that’s a massive move in the historical context of the Treasury market. Even some sectors that you would usually associate with being defensive have been under strain. An example is the gambling sector – people don’t usually let an economic downturn stop them from betting, but with so many sporting events called off it is having a negative impact on that sector."

What's next?

Of course we’re hoping the outbreak comes to an end sooner rather than later, but at the moment it’s difficult to tell when that might be.

Beyond the devastating human impact, the knock-on effects are causing lots of volatility and uncertainty in stock markets. We aren’t expecting the virus to go away anytime soon, so expect it to continue to hit the headlines. Remember past performance is not a guide to the future.

As always, we’ll keep you up to date with the latest developments. Sign up to our weekly email below if you’d like our top picks sent straight to your inbox.

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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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