MARKET PULSE BLOG

Multi-asset perspectives on navigating through the crisis

Eric Van Nostrand| Philip Hodges, PhD| Thomas Becker, PhD |Apr 20, 2020

The impact of the coronavirus pandemic has stretched across asset classes, geographies, and time frames, leaving investors around the world concerned with additional risks they may face in meeting their desired outcomes. To provide some holistic portfolio insights that may help, we recently asked three senior investors from our multi-asset strategies platform to weigh in on how they are navigating this environment.

What have been the key themes that the multi-asset teams have been discussing in recent weeks?

Van Nostrand: Three key themes have emerged across our diverse set of multi-asset teams over the past couple weeks. 

First is the impact on economic activity. How deep are the troughs in GDP growth, in corporate profits, in labor markets, and how long are they going to last? It’s only with that fundamental outlook that we can have confidence in taking active investment decisions. 

The second theme is how markets are currently assessing the economy. This is important, because when we take an active investment position,  we're looking for a gap between what the market is discounting in terms of economic output and our own fundamental view. 

The third theme is the 2021 economy. We are spending a lot of time thinking about the ways that this crisis is going to change the way our economy operates over the long run, even once we're out of the hole that we find ourselves in today. 

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We are spending a lot of time thinking about the ways that this crisis is going to change the way our economy operates over the long run, even once we're out of the hole that we find ourselves in today.

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How do you adapt your process in an environment that is atypical and very different from what you've had to manage through?

Becker: First, this is a different kind of recession. Recessions in the past 100 years in the United States have almost always been caused by one of two things. Either the Fed has induced the recession by tightening monetary policy to control sharp inflation, or some bubble in financial or real assets has gotten out of control and burst, creating a destabilizing, financially led recession. This current crisis is more akin to a natural disaster. A particularly sharp and globally coordinated natural disaster that hit everyone at once. 

We tend to see opportunities at the intersection of our insights on the macro environment and market pricing. The speed with which asset prices are moving in the current environment and the lack of timely macro data has meant that our process is more informed by pricing insights. For example, we observed in February that volatility-constrained funds were forced sellers as volatility spiked, and that was further exacerbated by the rise in correlation between stocks and bonds in mid-March. That pricing dislocation provided tactical opportunities for some of our teams to add risk in equities and increase duration in portfolios. 

We’ve also analyzed epidemiological data from multiple sources and combined it in a way that can generate some actionable insights. We've emphasized the capacity constraint of healthcare systems, both at the country and local levels as markets have become fixated on that metric. We are also doing analysis on the impact of containment measures like social distancing and have found that buying markets that implement more stringent measures worked well over the last few months.

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This current crisis is more akin to a natural disaster. A particularly sharp and globally coordinated natural disaster that hit everyone at once.

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A key tenant of diversification is having ballast from fixed income. Given how far rates have fallen, how do you view bonds today?

Hodges: The consistent surprise in the markets for years has been that interest rates have been expected to go up, but have instead fallen. So, our view on fixed income is twofold. On one hand, there is an environmental diversifying aspect of holding bonds because they are exposed to different economic drivers than other risky assets.  They have been a good asset to hold through negative growth shocks. That could continue to happen as interest rates approach zero. However, there is also a long-term investment problem that comes as yields shrink toward zero, which is that carry is limited.  We have started to diversify our diversifiers by looking at other flight-to-quality assets that offer a similar economic exposure as bonds but are less sensitive to the direction of real interest rates. This includes things like adding gold, hedged against industrial metals, or implementing a steepener trade in U.S. fixed income that tends to pay off well in a crisis environment, but can be duration neutral. As yields on traditional government bonds approach zero, these other exposures, which may not have great long-term returns but offer potential protection, become relatively more attractive.

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We recognize that a lot of those long-standing assumptions about the way the global economy works might be shaken by this crisis, not just for a couple months, but in the years to come.

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Looking beyond just the role of fixed income in a portfolio, it’s fair to say that we are going to be doing a lot of re-evaluation of some of the long-standing assumptions of our investment playbook. We recognize that a lot of those long-standing assumptions about the way the global economy works might be shaken by this crisis, not just for a couple months, but in the years to come.

Tom Becker
Portfolio Manager, Global Tactical Asset Allocation Team
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Phil Hodges
Head of Research, Factor-Based Strategies Group
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Eric Van Nostrand
Head of Macro Research and Investment Strategy, Multi-Asset Strategies
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Making sense of market turmoil
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Making sense of market turmoil