Markets remain volatile amid lockdown exit “marathon”, says BlueBay

Man in a mask on public transport

Volatility across asset classes will remain elevated as global economies grapple with the continued coronavirus lockdown, with Black Swan events appearing “all too often”, according to BlueBay Asset Management.

Mark Dowding, BlueBay’s chief investment officer, said it is unlikely that any market rally over the next few months will proceed in a straight line, describing the period ahead as a potentially “bumpy journey” but also “rich in opportunity.”

“We should expect markets to remain volatile as we go through the next couple of months. I think the example of the vol spike in oil is a reminder of this,” Dowding said on a recent BlueBay podcast update.

The recent energy market collapse – which last week saw the US WTI benchmark dropped into negative price territory for the first time ever – caught many by surprise, and underlines fundamentally how “all is not well in the global economy.”

“This is another one of these Black Swan events, which are meant to be very rare, but seem to be coming around all too often,” he added.

Observing the prevailing investment backdrop, he pointed a wide spread of opportunities in assets traded by London-based BlueBay, a fixed income and emerging markets hedge fund.

“It's almost interesting to observe that whereas stocks have recovered about 50 per cent of their losses on the start of the year, in assets like investment grade corporates in Europe you've only recovered 25 per cent and in the periphery, you're still close to the wides,” he noted.

While the US government is perceived to have offered considerable support to its economy, EU action is seen as more of a series of incremental policy steps.

“European policymakers have a habit of getting there in the end,” he said. “We still want to own those assets such as European corporate bonds and indeed the European periphery, which should benefit most directly from direct policy action.”

He added: “So if there’s anywhere where I think there’ll be more of a catch-up trade in the course of the next two months, I think it is in those assets in the Eurozone which are perhaps closest to that policy support.”

Reflecting more widely on the lasting impact of the coronavirus pandemic, Dowding suggested exiting the lockdown would prove to be a “marathon, not a sprint”, and acknowledged that infection rates may potentially rise again in countries that have reopened their economies.

Even once the spike in infections and deaths from Covid-19 has passed, a return to normal “will be a long way back”, he conceded, warning that global travel may be materially reduced for some time, and homeworking will likely become more commonplace on a permanent basis.

“I think we also see the crisis perhaps accelerate trends towards deglobalisation, as countries look to bring production back home,” he added. “It would be wrong perhaps to think that life will go back to where it was as at the turn of the year.”