Monthly outlook end-March 2020
- 06 April 2020
- 5 mins reading time
The demand for lower-risk rated investments, such as gold and government bonds, has pushed their prices up to levels that look expensive. That leaves a potential for bigger falls than gains. Perhaps recognising this, some investors have sold some holdings of these assets in order to secure profits in a turbulent environment.
As a result, we have a slightly less positive outlook for these assets overall. The qualification to this, though, is that they could rise further in value if the economic downturn becomes deeper or more sustained than we currently envisage.
One piece of good news on this front, is the apparent rapprochement between Saudi Arabia and other oil-producing nations. If this leads to an international agreement on oil supply levels, the ability of higher-risk rated companies to meet their debt obligations would be likely to improve, and that could bring some stability to that sector of the bond market.
The situation for equity mirrors that of bonds in some ways. The price falls have been severe, but the outlook is not yet clear. The number of virus cases is still rising in the US while questions are being asked about the veracity of China’s official number of victims. So peak contagion appears some way off at the moment. Until that point is reached, it will be difficult for equity valuations to deliver a sustained recovery.
That said, our analysis suggests that equity prices have fallen in anticipation of a short recession. We calculate that prices are now substantially lower than they should be in relation to long-term underlying value.
The situation is now one of uncertainty. If the virus spread can be handled and the oil situation resolved, a short recession would appear to be appropriate. But there are plenty of question marks over both of those, so we’re not ready to increase holdings of equity just yet.
In short, we believe that while it might be time for us to sell bonds, it’s probably too early to buy equities.
Any views expressed are our in-house views as at the time of publishing.
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