The spread of Covid-19 profoundly affected global markets in the first quarter, particularly from March as numerous countries went into lockdown in response to the pandemic. This resulted in severe declines and extreme daily swings in asset prices not seen since the global financial crisis in 2008. Government bond yields collapsed by more than 100bps in the US and 20bps in Germany as fears over the coronavirus caused steep falls in equities, corporate bonds and other assets. Investors favoured the traditionally perceived safety of government bonds due to the growing likelihood of a deep global recession, resulting in US Treasuries and UK Gilts generating returns in excess of 8% and 7% respectively. German Bunds returned a more modest 2.2% over the quarter, while performance on European peripheral government bonds was negative. Meanwhile, total return on corporate bonds fell to -6.2% in Europe and -3.5% in the US as spreads on investment grade issuers tripled in the US and doubled in Europe.
As the crisis unfolded, governments and central banks announced unprecedented support programmes to help bolster the economy and stabilise financial markets. These measures included, among others, rate cuts, quantitative easing, loan guarantees, fiscal stimulus and access to liquidity lines. For several days, companies were unable to issue bonds although this drastically improved towards the end of the quarter. US investment grade bonds ultimately saw a record month of issuance in March, as the Federal Reserve’s support measures gave investors reassurance that their bond portfolio would be protected in a severe recession scenario.
Despite the strange and challenging times of lower yields and higher volatility, we continued to eye keenly opportunities across sectors and the capital structure, as well as in individual single name credits. As the selloff unfolded throughout March, we were able to take on new positions in credits that had particularly suffered while still offering strong liquidity features to weather the crisis (e.g. large cash positions or potential government support). For example, we initiated positions in PARIS AIRPORT, AIRBUS, GOLDMAN SACHS and TOTAL.
As active investors, we focused on staying clear of the problematic areas and ‘zombie companies’ that could face difficulties servicing their debts. By the end of this period, we were also conscious of how the coronavirus crisis could accelerate downgrades and were not only avoiding the pitfalls in travel or leisure but also continuing to concentrate on the highest quality bonds in non-cyclical sectors, mainly in Europe again given the European Central Bank’s ongoing bond purchasing programme.
We expect economic activity to gradually resume by the end of Q2, with a more pronounced rebound to be expected in Q3 as lockdown measures are progressively eased. The pickup in GDP growth will be assisted by the more persistent and structural elements in the fiscal stimulus announcements and the reabsorption of involuntary savings after the collapse in consumption seen in recent weeks. In this environment, we would expect high quality credits to outperform government bonds in line with previous episodes of QE.
Past performance is not a guide to future performance. The value of investments may fall as well as rise and investors may not get back the amount invested. Income from investments may fluctuate. Currency fluctuations can also affect performance.
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CLI1607 Expiry on 30/04/2020