Investors grapple with continued volatility across global assets
The market fallout from the coronavirus pandemic will see continued volatility across equity, credit and commodity markets – but also potential investment opportunities.
Analysts at Man Group, the London-headquartered publically-listed global hedge fund group, observed how emerging market cross-asset volatility last Monday was bigger than during the immediate aftermath of Lehman Brothers’ collapse in September 2008.
“The silver lining is that the risk/reward for equities six months post the event – if you can stomach the volatility – has historically been excellent,” Man said in a note on Tuesday morning.
But strategists were also keen to sound a cautious note, pointing to the violent episodic bouts of volatility in the MSCI World Index in the aftermath of previous shocks.
In September 2008, there was an immediate 9 per cent rally before the index plunged another 40 per cent to hit its low, while the 2011 sovereign debt crisis saw a rally of 7 per cent following the initial selloff, followed by a further drop before it rallied 17 per cent. During the August 2015 China devaluation, the index enjoyed a 5 per cent bounce, then a slide, followed by a 12 per cent rally.
“In all cases, after the initial bounce, the MSCI World Index has made lower lows than the initial selloff before recovering,” they said.
Meanwhile, the prevailing volatility means investors will have a need to de-risk their portfolios as value-at-risk levels have increased, according to BlueBay Asset Management.
Zeroing in on emerging markets picture, Anthony Kettle, senior emerging markets portfolio manager at BlueBay in London, said FX will continue to be fragile as the dollar strengthens on the back of the US rate cut.
In terms of positioning, EM rates will suffer from position unwinds “but, ultimately, will be interesting from the long side,” Kettle observed in a recent note.
“The double hit from an escalation in the coronavirus spread and much weaker oil prices has made for a toxic mix in EMs,” he noted. “The lower oil price, if sustained, may have a meaningful impact on the fiscal balance of many EM sovereigns and we believe raises the default rate for the EM sovereign and corporate asset classes.”