Vimal Gor

Head of Alternative Duration

Vimal Gor’s weekly COVID-19 analysis for investors

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Here’s the latest weekly COVID-19 investor wrap 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’ll cover these weekly updates in three ways.

Firstly, we’re going to cover off on the virus pandemic. Secondly we’re going to look at the economic changes as they impact in the economies. And thirdly, we can look at the market response to those changes, the central bank and government action.

So firstly on the pandemic, it’s quite clear that the lockdown is having an effect.

Where people are doing a proper lockdown you can see the curves flattening off quite dramatically. And that’s exactly what we need to see because that’s what pushes the number of beds in the healthcare systems back, decreases the demand for ventilators and means that potentially we can weather the storm.

The problem is a number of countries are not locking down, most notably the US, and you can see that actually their numbers are the worst of any economy in the world right now.

As I mentioned last week, there’s a choice that governments need to make and that’s about crushing the economy or letting lives go.

And ultimately what you have to do is crush the economy because then you’re saving lives. And that’s obviously what a government’s mandate is.

But you question what the US is doing now because they’re not moving to full lockdown. I think they’ve got a fifth of the population in lockdown and Trump is talking about actually rolling some of that back in the next few weeks.

Well, that’s exactly the wrong situation because you can see their numbers are getting materially worse.

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The economic data we’re seeing are absolutely terrible. And that’s across the globe. We could be looking at unemployment rates at 25% up to 50% in some economies. We could see GDP falling 25 to 50% in Q2 or Q3.

Everyone’s expecting strong bounce-backs in the latter half of the year. But I really get worried about what happens if we don’t see those bounce-backs.

And actually what we see is an L shape recovery or a very, very drawn out slow recovery, which is in contrast to the strong bounce that everyone else is expecting.

Impact of government actions

So since last week’s video, we’ve seen numerous actions by the authorities.

We saw increased quantitative easing by the US Government and we saw massive quantitative easing coming out of the RBNZ in New Zealand.

We’ve also seen the huge fiscal packages coming out in the US which — depending on whichever market report you’re reading — could be somewhere between $2 trillion and $4 trillion.

There’s a massive degree in leverage that can be employed, so it’s very difficult to actually get a handle, but we know they’re trying to backstop a number of businesses from going under.

That’s really what these packages are aiming to do. They’re trying to stop small businesses going down.

Because the problem is, most of the economy — well over 50% of the economy in the US and well over 50% of job openings in the US — are small companies. They’re companies employing less than 50 people.

So if that sector dies out, which it’s very clearly at risk of doing, when we get on top of the pandemic and the fiscal pulse begins to move the economy, you’ll have no impact because there’s nothing left to stimulate.

So the focus of governments very clearly across the world is to try and support the small business sector. So when the bounce-back has the ability to happen, it actually is able to be seen in the economic data.

We have this clear policy by central banks to drive bond yields across the world to zero, and to hold them there. And you can expect they’re not going to be hiking rates for many, many years.

That’s why if you’re able to buy US 2-years around 30 basis points, that pretty much looks a very good deal. Because you know they’re going to trade to virtually zero and just stay there forever. So that’s 30 basis points you’re going to make there.

You can be long Aussie threes because you know the RBA’s backstopping you at 25 basis points.

So if you buy at any level above that, it’s a good trade, and arguably they’ll trade through that 25 basis points level and then ultimately curves will pancake across the world and all bond yields will be heading to zero.

So we’ve got that by central banks. But then on the other side we’ve got this massive fiscal policy that’s coming out across the world. They’re trying to backstop the economy by supporting the smaller companies and making sure that we can bounce back.

That’s the key thing to be aware of here.

Market reaction

So now let’s move over to markets and see how markets are taking these changes.

Well firstly we’ve seen a very strong rally in bond yields. Obviously on the first part of this down move in equities, we saw bond yields rally massively.

We saw 10-year treasuries on or about just under 40 basis points. They backed up to 115. They’ve rallied since then quite materially. And right now 10-year treasuries are at 78 basis points.

They should head towards zero sometime over the next six months to year as well.

So again, being long bonds is a key way we’re positioning in these markets.

Obviously we saw the US packages trying to support investment grade credit, and they’re flooding the system with liquidity. They’re supporting investment grade credit out to four years effectively — not loan forgiveness, but loan holidays, these kind of things.

I just want to be quite clear here. They’ve bought the market time, but there’s a big difference between impact in solvency, and impact in liquidity.

It’s quite clear that the liquidity issues that were very, very prevalent in the market have been largely dealt with by the packages the Fed’s done.

But all the Fed’s done is address the liquidity issues, they haven’t addressed the solvency issues which encumber a number of these companies.

And the reason they have solvency issues is they massively geared up their balance sheet over the last few years.

So we’ve seen this bounce in investment grade credit. High yield has bounced in sympathy with it, but still looks like it could sell off, and Emerging Markets still looks a little bit worrisome to us.

So we’re still sitting more on the nervous side. We’re defensively positioned here.

We do acknowledge the fact that the markets are oversold and with the amount of ammunition that’s being thrown at them by governments and central banks, there is a high likelihood we get a bit of a bounce.

Certainly into month’s end, as a large scale, rebalancing is going to happen.

But the three-to-six month view, we’re still nervous about the valuation of risk assets and we like being long bonds here.

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