A collapse that was waiting to happen

Investors are facing a new reality. The longest bull market in history seems to be over. A double shock, triggered by a global pandemic and an oil price war, are firing off some of the biggest moves since the 2008 financial crisis. So how should investors respond? After an extraordinary week for markets, we sat down with our global CIOs to discuss volatility in response to Covid-19 and the oil price war, liquidity issues and where we go from here.

Key quotes from the CIOs

On market reaction and flows

• Andrew McCaffery, Global CIO, Asset Management: The opportunity for some resetting was certainly there.
• You see a lot of flows in synthetics, into futures, over-the-counter type trading just to try and give some management to those exposures in recent weeks. Now the real challenge is how do we see positions play out as you start to think about do you want to maintain exposures overall and therefore have to unwind some of the underlying.
• We've seen a lot of hedging, big volumes going through at times, but not really the sort of panic that one might expect given the price action, and not the big position changes.

On liquidity

• Steve Ellis, Global CIO, Fixed Income: The liquidity position is very lopsided in markets, in that since the financial crisis, the sell side - banks effectively - have much lower tolerance in terms of their balance sheet to warehouse risk. So it's always a risk when you unwind, that there's no counterparty. I think there's been a confluence of events which have really triggered something. Liquidity really has just come to a standstill in the last few days.
• The key thing that we're doing is making sure that we have the conviction in the fund, maintaining high levels of liquidity so that as and when these markets do stabilise, we are in a position where we can take advantage of this dislocation.

On defaults

• SE: I think with oil prices going towards 30 dollars a barrel, we're going to see 40 to 50 percent of US oil producers going bust. That's going to cause defaults to rise.
• AM: We have a number of companies which have been running on very tight margins in terms of cash flow management. The need for that refinancing is extraordinary through the course of the next two or three years, and much of that is in private markets as well, not just in the public markets.

On oil

• Romain Boscher, CIO, Equities: The oil shock is really the perfect transmission mechanism from the coronavirus outbreak to the real economy, because oil is impacting credit, FX and the real economy. It is a significant and, by the way, positive shock for the consumer because it does bring more purchasing power.
• AM: We’re seeing a very interesting development even in the very short term between what's happening in Asia and in China, post the worst of the virus impact. Now getting a positive impact from oil are those who import it - a little bit of help at a very difficult time.

Where next?

• SE: I think we're going to see a lot more policy response here. So the Fed are going to be cutting, the ECB potentially cutting as well. But it's going to be fairly impotent. I think there has to be a fiscal response here.
• RB: Valuations now are clearly already pricing a recession and people are starving for yield. So that should help to preserve a decent level for equity prices. Having said that we are preserving a quality bias. What does that mean? It means that we are avoiding stocks with significant leverage because when you are late cycle, from a credit cycle perspective, it's not time to buy leveraged names.
• AM: Until we start to see more evidence of what's playing out in the real economy and the direction of fiscal policy to really address the issues, then I think markets can recover on the expectation of fiscal policy, but they'll be challenged through the next couple of quarters by how much that has an impact.