While central banks have created a liquidity-driven rally in risk markets, we still think that the worst data is still ahead of us. 

Things have changed forever in the economy. We have incredible unemployment around the world from the shutdowns. There are a huge number of small and medium-sized enterprises that will never return and those jobs will simply be gone.

Against this backdrop, here I discuss the prospect of another sell-off in risk assets, flag two major potential flashpoints, and look at how well bond markets have performed recently. 


After the intense moves of March, April was a much calmer month. Equity markets enjoyed a very solid rebound after a severe selloff in March. It's worth thinking through what are the lessons that we've learned so far in all of this and where might we go next?

We've spoken to our investors about the five stages of grief that people often go through and it's not a bad framework to look at what's happened with COVID-19 so far. The five stages are denial, anger, bargaining, depression, and then finally, acceptance.

There's no question that early on in this saga, there was widespread denial that this could be a huge market event and then we saw the full anger of markets. I guess over that course of that March sell-off, huge illiquidity in some asset classes. Some asset classes still locked up, but then the bargaining phase, the enormous response from central banks. We really must take our hat off to central bankers. They have used all of their weaponry in one hit and now we've enjoyed a liquidity-driven rally in risk markets well off those lows and stability has been resumed.

Sadly, we still think that a lot of the weaker economic activity numbers are ahead of us and that will be somewhat of the depression phase. And then ultimately the acceptance that things are just forever going to be changed in so many aspects of our lives, in so many aspects of the economy.

This is where this liquidity rally can now make the reality of the solvency of the situation and where we believe another sell-off in risk assets could emanate from. Clearly we have incredible unemployment around the world as a result of the shutdowns. How many of those firms can get back up and running as we come out of the isolation that we've been forced into globally? We still feel there's a huge number of small and medium-sized enterprises that will simply never return and those jobs will simply be gone. Sadly for many of those affected folks, they will need to retrain and try and get employment in other sectors.

Generally that unemployment rise follows the solvency of corporates very closely and with estimations of somewhere in the mid-teens up into the twenties. If we look at some of the initial claims data in terms of unemployment numbers, these are horrific outcomes and will clearly have a huge impact on economic performance, corporate performance and the performance of our economies and our livelihoods going forward.

So we still feel that this is in front of us as much as the initial sugar hit of additional central bank liquidity has calmed things down and allowed many risk assets, which were very oversold mind you in March, to recover somewhat. Now we need to filter through all of the jigsaw pieces which were thrown up in the air in March and work out which ones have quality, are likely to have some liquidity and be investible moving forward and which might be under sufferance from low credit quality, lack of liquidity. We're still seeing large parts of the lower end of the corporate credit spectrum trading at very stressed levels and not having any return to liquidity.

I think many other fixed income investors are finding that their fund managers have still got very elevated sell-side spreads, which we've been very critical on. We don't believe that that should have been the case and we think that a lot of those folks were fishing in a pond a long way from where they probably should have been, in order to offer you a genuinely defensive opportunity in terms of your fixed income allocation.

I think that with the benefit of time, we're going to see that the high quality and the liquidity will return to very good quality assets and they'll have no trouble performing and continuing to move forward and offering the solutions that investor's sake. Whilst high-quality risk assets are going to do fine, lower quality are going to be under some sufferance and so that's where investors are going to need to comb through the wreckage and work out what remains investible, what's to be avoided and where their portfolio changes need to occur.

With regard to bond market performance, global bonds did quite well through the month of March. Domestic bonds had a slight pullback but in general, it was pretty small, but they have done a fantastic job over the course of this episode to provide that negatively correlated solution with equity markets rising, domestic bonds having a small setback, global bonds actually moving forward, but they have generally done very well and we've been very happy with our solutions and continuing to generate high-quality alpha through what's been very testing market environment.

As we look forward, we're coming into to the May period, the famous sell in May and go away. One thing that we would caution or a couple of things that we would caution investors to give some consideration to.

Firstly, there seems to be bipartisan support in the United States to want to pin the blame for COVID-19 on China and that clearly gives us an episode where we could get far more political tension. We are coming up to that election period in November. Everybody is going to need an enemy to try and pin this on and we know exactly the way Trump will go about this. So be warned that there is likely to be more rhetoric around this. Certainly, as you know, the numbers of deaths are climbing continuously in the United States. Now estimations of more than 100,000. There is going to be retribution sought in some way, shape or form and that does concern us.

Secondly, the Eurozone and the performance of the peripheral European governments is always a flashpoint potentially but there are Italy, in particular, in dire need of the help of their neighbours at a time where their neighbours are not in a particularly strong position to provide that support. So we think that coming into the summer, which is a time when things often flare in Europe, that's also worth having a think about in terms of the way that it might impact risk sentiment.

As we said, we do expect the solvency of the situation to decay very, very quickly. Clearly the longer that we stay in lockdown, the more exponential damage that is done to the economies and done to small and medium sized enterprises, it is not a linear function. You can obviously have a stoppage for a week or two. We do that in holiday periods all the time but now that we're getting into four, six, eight week type stoppages, the amount of capital that is in reserve is being drained very quickly and there simply won't be capital to go out and rebuild a forward order book or order what is required in terms of inventory. A lot of those firms will simply not be able to get going

So we really do need, from an economic point of view, to get back out there, try and balance the needs of the health of our economies and societies versus the need for our economies to continue to generate economic activity and sustain us all on a go forward basis. 

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Jerome Lander

Nice summary Charlie

Mark Dawson

Nice transcript Charlie. I think there might be another stage called despair, or maybe that's mixed in with depression. We've obviously had a fair bit of both already but nothing like I'd expect after the most recent market crash. The latest market bounce has been nothing short of spectacular. Will it continue merrily along like there's nothing wrong or is it just a good false start? I believe we've got worse to come! and that we haven't seen the real despair yet. The type of despair that makes everyday investors want to throw in the towel and never invest in stocks again. Those wanting to sell at any cost. Now maybe the time to strengthen your portfolio not only with bonds but also with gold. Switch out of those risky assets while this latest bounce lasts.

Venkata kancharla

Good points to take from this transcript while investing in Equities. Bonds are preferred by people who are totally risk averse due to many factors.

Mark S

I can't see any substance behind the stance being taken beyond perhaps wishful thinking. I think a lot of fund managers would earn a bit more gravitas by fronting up and admitting they got the timing wrong. There are no signs that the low point is not behind.