Vimal Gor’s weekly COVID-19 analysis for investors (Apr 3)

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Here is a weekly COVID-19 investor overview covering virus spread, economic impact and market insights from Pendal Head of Bond, Income and Defensive Strategies, Vimal Gor.

Watch this short video recorded at Vimal’s home office, or read the transcript below.


I’m here to do the third of our coronavirus outlooks. I’ll stick to the same format I’ve used for the last couple of weeks.

We’ll talk briefly about the virus, about the economic impact and then what’s happening in markets.

Virus outlook

So firstly on the virus, it’s very clear now that the lockdowns are having a material impact.

If you look at the countries that have done them in full force — Australia, New Zealand, and most of Europe — you can see the numbers tailing off quite materially.

Unfortunately the US has been very slow to implement lockdowns — only about a fifth of the country is in lockdown right now — and they’re not taking it that seriously. Therefore the US numbers are strong and continuing to increase pretty much on that incremental pace. At some point the US has to introduce more formal lockdowns to try and get on top of this thing.

The second thing to note about the virus is we begin to see lots and lots of news reports about new vaccines or tests and things coming through.

That’s great news because we’ve got the best minds in the world working on this. And all working on this for the same outcome, so I can’t help but hope that there’s some major breakthrough that we’re going to get soon that will enable us to come out of lockdown or even to beat the pandemic totally.

Economic impact

Moving on to economics, make no mistake, the numbers are absolutely terrible. Every bit of data we see is far surpassing on the downside expectations and the range is so large.

To give you an example, the Q2 range economists have for GDP is somewhere between -9% at the most bullish and -45% at the most bearish — and the Fed still looking for a decent bounce-back later this year.

The thing I worry about the most is, that we get this big draw-down in GDP, but actually we don’t get the bounce-back. And therefore we start getting numbers for the calendar year worse than -4%, -5% and somewhere about -5% to -10% which would be really problematic.

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But alongside the data getting weaker, what we have seen is continued response from the authorities. Central banks, especially the Fed, are doing new packages virtually on a daily basis.

As I mentioned in last week’s chat, they’re actually backstopping the entire economy now. It’s just not about the Fed being the lender of last resort to the banking system. It’s about the Fed being the lender of last resort to the entire economy.

Here’s an example to give you an idea about the size of the measures that have been enacted by the US both on the monetary and fiscal side. If you’re a small company employing less than 500 people, the packages that are currently out will effectively cover your rent, wages and utilities for a two-month period.

Effectively what they’re trying to do is put the economies into hibernation, so when we’re through the pandemic we can bounce back.

The other thing we’re seeing out of central banks, and again led by the Fed, is this desire to deal with the burgeoning money market problems. We can see that US front-end LIBOR (London InterBank Offered Rate) are quite high and that’s about credit risk in the system and the Fed is flooding the system with liquidity. They’re doing it the front-end of the US dollar curve, plus they’re doing swap lines across the world trying to force dollars into the system and to deal with this problem they’ve got in the front-end.

And right now it looks to be working. It looks like we’re beginning to see the turn in FRA-OIS and US dollar LIBOR rates and this can be only beneficial to the broader economic system, which up until now has been starved of US dollars.

Market outlook

And now on to markets. It’s funny because I don’t really view bonds with less than a five-year maturity as interest rate duration instruments anymore.

I believe they’re s purely a function of what’s happening in central banks and Quantitative Easing (QE) programs and therefore you can just hold them as you know there’ll be moving towards zero over the medium term.

I also believe that’s what’s happening in the back-end of the curves now. When you look at US 10-years around 70 basis points, they still offer significant value to me because you know, the QE packages the Fed is conducting plus the large flow we’re seeing out of the Japanese market –Japanese investors into overseas markets — will continue to push your bond yields lower.

So even though we’ve seen a material bond rally over the last few months, I still think there’s more in this rally as all global bond yields converge around zero.

So hopefully that’s given you an understanding of how we’re viewing this environment across the pandemic, the economics and the market.

I’ll see you next week. Thank you.

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