As we in the Western hemisphere are beginning to get used to what is now the new normal (at least for the time being), of lockdowns or other local government restrictions, to combat the coronavirus (Covid-19) pandemic, I wanted to share with you my thoughts on markets and the wider situation.
I have lived through several recessions and crises with the most prominent being the Great Financial Crisis, which was a game changer. However, what we are experiencing now is unparalleled in any of our living memory. Not since the Second World War have we seen such an incident in terms of social and economic upheaval across the whole world that has led to exceptional responses from governments of every nation.
Let us take a minute to reflect on some of the major events we have witnessed in the last few weeks.
Both Italy, Spain and the US have seen Covid-19 infections surpass that of China, where it originated in December 2019. Sadly, the death toll continues to mount across the world with much of Europe now in lockdown and three out of four people in the US facing some sort of restriction. Away from developed markets and familiar landscapes, the scenes of mass numbers of people migrating in India on the back of lockdown hit home hard.
We have seen stock markets fall by more than 30%, wiping billions off the value of companies, investments and pensions virtually overnight before rallying to a lesser extent. We have seen the biggest ever one-day gain in the history of the US markets, while volatility operating continues, making the first quarter the most volatile for financial markets since 2008. Credit and interest rate markets have been no less volatile.
We have seen unprecedented action from central banks, particularly the US Federal Reserve, which have been at the forefront of the action. Then there has been nothing short of eye-watering fiscal measures as governments around the world adopt a 'do whatever it takes' mentality. This has seen both central banks and governments using an alphabet soup of abbreviations to describe initiatives to support markets and the economy.
So, what does this all mean? Well to start, there is sadly the human cost; lives, jobs and businesses are being lost around the world as the impact of the virus and the measures to prevent its spread begin to be felt. For us at Aegon Asset Management, our priority is the safety and well-being of our employees, our clients, the communities in which we work and serve, and our suppliers and vendors.
To this end, the vast majority of our employees across the globe are now working from home and adhering to local procedures, as well as our own policies. We are in regular contact with our vendors and suppliers, and it is our aim to keep our clients and investors regularly updated on what we are doing in our portfolios and business through article updates and webinars.
In terms of markets and the economy, I would like to tell you that I think the end to this is in sight, but that is probably a bit premature. I think we may have seen the worst of the panic, with the dual market sharp shock of the pandemic and the collapse of the oil market creating a perfect storm, driving volatility and, in turn, a rush to de-lever and exit risk.
I believe the geopolitical forces behind the oil collapse are likely to continue for a while as the main protagonists aim to take out the capacity of other suppliers. The Saudis have increased production to around 12 million barrels a day, up from nine million and spot oil prices are currently trading around $20 a barrel mark, but the longer-term 12-month forecast is around $35 a barrel. So, I think there is some way to go before they take their foot off the gas, if you excuse the pun.
For equities, despite the losses to date, I think that markets have still not factored in the impact of the epidemic on revenues, and general market sentiment is that we still have not got full control of the outbreak. I do not think this will be resolved until people believe the lockdowns we currently face are working, or at least beginning to work. Therefore, I think equity markets are still in for a bit of a rocky time yet, and we should prepare for a few ups and downs over the coming couple of months.
In fixed income assets, we are seeing a slightly more mixed picture, with the stimulus programs beginning to bring some elements of normalcy to the markets. The 'do whatever it takes' quantitative easing, which central banks have embarked on means there is a buyer of last resort in the investment grade and government bond market which has given it some confidence. In fact, March turned out to be a record month for dollar issuance with US$260 billion of investment grade credit hitting the market. High yield and less liquid parts of the fixed income asset class have still to feel the love extended by central banks to better quality assets.
Once the dust has settled, I do think we may see a rebalancing of global trade as governments continue to support their local economies by reinvesting in manufacturing capabilities, bringing at least a temporary halt to the whole globalisation process, even at the risk of stoking inflation.
In the meantime, we will continue to keep our investors and clients updated on our developments and our views, while delivering the service and investment performance they can expect during these difficult circumstances.
CEO Aegon Asset Management
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