Vimal Gor: What a second wave of infections would mean for investors

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How will the risk of a second wave of virus infections impact investors? Pendal’s Head of Bond, Income and Defensive Strategies Vimal Gor explains in a new video interview with online business channel


Watch the video above or read the transcript below.


AUSBIZ.COM.AU INTERVIEWER: Vimal Gor is Head of Bond, Income and Defensive Strategies at Pendal, and he’s joining us live via Skype. Vimal, great to see you there again. Good to have you on Ausbiz. We have this very real risk of a second wave of COVID — some say still the first wave. Are you concerned that it seems the US Government is going with the Swedish approach — to just let it ride out?

VIMAL GOR: YesIf you look across the numbers coming out of the US, there’s a very strong bifurcation between the States that voted for Trump and the States have voted for Clinton. The Clinton States, obviously California, US, seeing their numbers fall quite markedly in line with a lot of the developed countries across the world.

And then you’ve got the other States, which were the Trump-voting States, which are the Midwest etc., where you’re seeing in the southeast the numbers pick up really quite materially. And I don’t know what the US does now because we haven’t got a vaccine, there’s, there’s no impetus or willingness to do further lockdowns.

And the numbers are picking up. I mean, what is the response for the countries, which can’t or won’t do lockdowns and no vaccines? I don’t see what the response is there. And this is going to be super interesting to watch this play out over the next few weeks.

INTERVIEWER: It’s pretty mind-blowing to think of the sheer number of Americans who have fallen victim to this pandemic. How do you, as an investor, gauge the psychological impact, the flow-on effects of a disaster of that magnitude?

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VIMAL GOR: Yes, that’s a tough question. I’m coming to the view that there are two things that are kind of useless to look at right now, but take up a lot of time and effort. One is the COVID numbers, because absent an idea for how the response is going to be by the government, we don’t know what the impact is going to be on economic data.

And second is the underlying economic data by itself. The problem with the data right now is that the size of the moves we’re seeing are so large that they’re just unable to be comprehended in terms of what that means for the market.

So the way I generally approach this is, markets generally move in line with the economic cycle and the best way to determine what the economic cycle is, new orders to inventories ratios and PMI, because the manufacturing sector leads the US economy, even though consumption’s larger, consumption, kind of does this, whereas manufacturing does this.

And so it’s the one that leads the economy into and out of recessions. But the problem is the numbers are so large and swinging around so much that they’re kind of pointless. And also because the amount of liquidity that the central banks have flooded the system with, it means that there’s this growing divergence between the underlying economic data in the markets.

So the only thing you can look at to try and get a gauge on where the markets are going or determine what value is purely the central bank packages. And so then, we saw last week that they’re coming out and buying investment-grade credit bonds in the US now, even though they’re pretty much at their all-time highs.

It seems a bit silly, but that’s one thing they’re doing. So you’ve got a green light to buy as much as you can in that space. We talked about fallen angels in the high yield market last time. They very clearly want the equity market to go up, they very clearly want bond yields to stay low.

They’re pretty much supporting every asset market under the world. So what COVID does to the underlying economic data and what the underlying economic data means for the markets is kind of broken now. The markets, we talked about this last time, the market’s largely fixed. That’s the problem.

INTERVIEWER: So if we were to see a vaccine, if we really do see that next stage, are we expecting to see a further rally in equities, a further fall in bond prices? Is that how the markets would play out? Would they be rational?

VIMAL GOR: Yes, I think it’s definitely positive for equity markets and that if we were to see a vaccine that would be great. Yes, it would definitely lead to a strong rally in equity markets. But I don’t think bond yields will sell-off because the central bank very clearly doesn’t want bonds to sell-off.

And because we’ve seen a massive increase in total debt, whether that be a household, corporate or government debt across the world. They don’t want bond yields to sell-off, which slows the economy. So they will continue to hold bond yields down, equity markets would rally, and then ultimately you would expect there to be inflation. And that’s something that I think we need to get our heads around.

That we’ve been in a deflationary environment really since the 1980s. And at some point, given the amount of fiscal largesse we’re seeing, we will be shifting to an inflationary environment. It’s just a question of when and how quickly that happens.

INTERVIEWER: So Vimal if you’re going to be long bonds, what is your preferred exposure?

VIMAL GOR: Well the front ends everywhere a lot now, I still think they’re going to go to negative rates. But you can buy US 10-year Treasury at probably 70 basis points today. And I still think they’re probably going to go sub-zero, probably down to -1.

Now to put that in context, if they go from 70 to -1, you’ve probably got a 40% return on those. So there’s still a lot of money to be left in the bond markets, and therefore I don’t believe you should be underweight bonds.

I think you should be max long bonds at this juncture.


Vimal Gor leads Pendal’s Bond, Income and Defensive Strategies team.

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