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The rapid spread of coronavirus around the world has caused a material repricing of risk throughout financial markets. In the fastest sell-off in history, the post-crisis plumbing is being tested like never before. Most evident is a grab for cash, with a large amount of volatility in asset prices including traditional safe-haven assets, such as gold and government bonds. The speed and level of dislocation has been exacerbated by the increase in redemptions across a range of markets, most notably in strategies that employ leverage. However, it is also evident across traditional investment-grade bond funds and some of the most liquid fixed income ETFs that were trading at material discounts to NAV – in our opinion a sign that intermediaries such as traditional trading desks did not have the capital to support efficient clearing levels for risk. In response to the events over the last few weeks, we have seen notable government and central bank action to provide support to the global economy. These actions include varying stimulus packages, SME loans, hints around helicopter money to support individuals and measures to support the ABS market. We believe it will take the market some time to evaluate the cross currents of record fiscal and monetary stimulus and, while the intervention should provide support for individuals and some corporates, we believe it is unlikely to lead to an avoidance of recession, given the significant global economic disruption that continues to take place. The key focus for our team is determining which assets we believe offer compelling risk-adjusted returns in the midst of the volatility, when it is still unclear how long the market disruption might last.
