As the Covid-19 virus spreads, investors can assess the potential sequence of market opportunities that will emerge from the crisis. The perceived features of the cycle of the coronavirus and the effectiveness measures taken locally to contain it are starting to drive allocations. A new market theme of Covid-19 de-synchronisation is emerging, a typical example being the long Asia.
The selloff has more or less eliminated deviations in equity returns (excessive vs. the long-term trend in earnings growth) and in credit spreads (too tight vs. implicit defaults), although not at the same pace everywhere (Europe and Emerging Markets at a discount vs. the US). Yet the selloff hasn’t priced in a permanent loss of potential growth, hence the permanent shock to earnings expansion. The margin for error for investors is therefore thin.
From an investment perspective, to detect the tipping point of the crisis, investors will need to look at the corporate-bond asset class where there is a race against time between liquidity and solvency. The de-freezing of the credit curve – crucial at the short end – will be necessary for validation of a full recovery in markets. Bounces in equity performance have masked this, but this is the indicator to watch.
Trying to time the bottom of the market is unrealistic. This is a time for investors to consider adding gradually, and with discipline, opportunities to rebalance their long-term strategic allocation, whilst keeping a firm hand on liquidity and quality of assets in the knowledge that uncertainty will endure.