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Monthly Investment Outlook

Monthly Investment Outlook

We publish a Monthly Investment Outlook that highlights our convictions on equities and bonds, as well as recent asset allocation changes.


Summary

  • MONTHLY INVESTMENT OUTLOOK - The viral demand shock goes global
  • GLOBAL TACTICAL ASSET ALLOCATION - A COVID-19 framework for markets
  • UBP ECONOMIC OUTLOOK - Lowering our world growth outlook
  • UBP ECONOMIC OUTLOOK - Risks of a "P"-Panic/Pandemic scenario are building but can still be avoided
  • GLOBAL EQUITIES - A broad based sell-off
  • GLOBAL BONDS - Remain selective in credit markets
  • RECENT VIEW CHANGES - Dynamically managing our asymmetric exposure

  • The 2002-2003 SARS outbreak framework that most, including ourselves, were drawing upon to anticipate the trajectory of the COVID-19 coronavirus outbreak requires an adjustment following the failure of authorities to contain the contagion to the Asian continent.
  • While an extended economic demand shock is itself problematic, the potential for a damaging credit shock as a second round effect should not be underestimated by investors. Even modest credit shock scenarios risk a further 15-30% decline in regional equities.
  • Recent central bank rates cuts are a necessary step but are not themselves sufficient to avoid a credit shock. Instead, timely and aggressive fiscal stimulus is needed in conjunction with monetary efforts to avoid this scenario.
  • If policy coordination is successful, global equity markets are close to pricing in a typical liquidity shock event. Moreover, the year-to-date widening in US high yield spreads could reverse, triggered by the implicit Federal Reserve ‘backstop’ which is currently underpriced relative to the European Central Bank credit backstop.
  • However, risk management efforts will remain critical in light of the looming credit shock tail risk. Long Swiss franc positions continue to look attractive for safe haven USD and EUR portfolios.
  • Moreover, with US 10-year Treasury yields having breached 1%, risk-reward no longer favours these positions. Instead, US mortgage backed securities which trade at their highest spreads since 2013 and which should be the focal point of further Fed policy action offer a safe haven with a bit more carry.
  • Alternatively, while holding its value well since the late-February declines in global markets began, we expect gold will continue to provide protection in times of uncertainty. Long, leveraged positions in gold may provide a near-term headwind and introduce two-way volatility as we look ahead. As a result, options on gold may offer investors more asymmetric risk-reward exposure in the future than the underlying metal itself.
  • Risk oriented investors may find opportunities in the recent spike in volatility via asymmetric structured solutions to cushion downside risks while allowing for upside participation. Similarly, carefully selected long-short hedge fund exposure can add value for risk focused investors.
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