Weathering The Storm:
Perspectives On Volatility Now

Turmoil in oil prices, uncertainty about COVID-19 and rapid moves by central banks have shaken the markets. What do our managers see as the likeliest outcomes in the short and long term?

17 March 2020

"The Fed’s actions are intended to indirectly support credit markets by supporting growth, providing liquidity and stabilizing the Treasury market. While these actions should prove helpful, they are not as powerful as a direct intervention in credit markets would be. Part of the reason that the Fed stopped short is that a direct intervention in credit markets involves other parts of the government. For example, if the Fed were to provide funding for corporate or structured credit, it would need the US Treasury to take the first loss on any facility in order to indemnify the Fed from losses."

- John Bellows, Ph.D., Portfolio Manager, Research Analyst


16 March 2020

"Economic policy thinking/action is rapidly shifting to a “whatever it takes” semi-wartime mentality to stem the panic and get through the economic upheaval. The main economic policy issue is the measure(s) needed to keep companies from failing and people from losing income caused by social distancing in order to put the brakes on the virus spreading. Companies and financial institutions need cheap credit in order to operate at a loss for a period of time without layoffs— people need support if they are laid off."

- Francis A. Scotland, Director of Global Macro Research


12 March 2020

"Medium term, China is the biggest beneficiary [of lower oil prices] as the country comes out of the COVID-19 induced downturn, it gets the gift of seriously cheap oil, helping speed the recovery...for countries like Turkey and India, both struggling economically and with leaderships that are under pressure, this could be a tremendous boon. If these low oil prices are sustained for a year (and clearly there are many reasons to believe they are not), the world may well be the biggest beneficiary as economic growth falters in the coming months."

- Kim Catechis, Head of Investment Strategy


10 March 2020

"The good news is that we enter this period of macro weakness with low inventory levels and capex below trend levels....currently we are seeing companies report some lengthening of supply lines whilst simultaneously consuming their limited inventories. Based on this, once economies gain traction again, we expect to see a rebuild in inventory of components and working in progress. This points to a sharp V-shaped bounce towards the summer commencing in China."

- Michael Browne, Portfolio Manager


10 March 2020

"The OPEC+ price war is one of the three worst possible shocks for markets engulfed by the COVID-19 crisis. The other two would be a hypothetical lockdown of parts of the U.S. economy and a second wave of infections in China. This regime change has accelerated the convergence of central bank rate expectations and brought long-end bond yields toward zero. We believe the March Fed meeting will bring an additional 50 basis point cut as the economic situation continues to deteriorate."

- Dimitry Dayen, CFA, Senior Analyst Energy & Jeffrey Schulze, CFA, Investment Strategist


9 March 2020

"We know intuitively that governments historically treat pandemics as highly unusual events and...typically only invest in their relevant infrastructure to cover ‘an acceptable level of risk’. It is obvious that ‘acceptable’ is a word that means different things to different people at different times. Maybe the relevant question should be, how can we evaluate the readiness of our country’s healthcare infrastructure, faced by COVID-19?"

- Kim Catechis, Head of Investment Strategy


4 March 2020

"The speed and decisiveness of the Fed's [surprise rate cut] reflect both the economic seriousness of the COVID-19 situation...as the Fed understands, the risks are elevated when growth, inflation and interest rates are all at low levels. In such an environment, we believe monetary policy should be proactive and aggressive to support growth and avoid levels moving even lower."

- John Bellows, PhD, Portfolio Manager/Research Analyst, Western Asset Management


3 March 2020

"Because of disruptions in businesses and operations, global GDP growth will likely take a hit...before rebounding in the second half of 2020 and next year. Unlike stocks or bonds, private real estate tends to be much less volatile. Unless the outbreak lasts for an extended period or severely impacts business operations and consumer daily life generally, we believe that the overall impact on U.S. private real estate should be minimal."

- Clarion Partners Investment Research


3 March 2020

"Headline risk suggests the virus may be on the verge of being declared a pandemic, though our base case is that [this] should ultimately play out like a bad flu season. The range of probabilistic outcomes will depend on available data, which is particularly challenging since stakeholders do not have complete information regarding the extensive impact of the virus, particularly in China."

- Tracy Chen, CFA, Portfolio Manager


2 March 2020

“The coronavirus as an exogenous event will likely extend the length of the overall cautionary yellow signal for the ClearBridge Recession Risk Dashboard, and a “V” shaped economic rebound from [its] effects appears increasingly unlikely...we believe caution is prudent at the current juncture given the potential for a continued period of heightened volatility.”

- Jeffrey Schulze, Investment Strategist, ClearBridge Investments


28 February 2020

"It is possible that the extent of supply chain disruptions, underscored by Apple’s recent sales warning, has yet to be fully appreciated. Equally significant is the impact on global tourism, given travel restrictions imposed on China."

- Chia-Liang Lian, Head of Emerging Markets, and Kevin X. Zhang, Western Asset Management


25 February 2020

"A meaningful economic downturn and market correction would lead policymakers to increase both fiscal and monetary stimulus...[if so] this would lead to a sharp rebound in both cyclical value stocks and economically sensitive growth equities, especially in China, Europe, Japan and emerging markets."

- Paul Erlichman, Portfolio Manager, ClearBridge Investments


21 February 2020

"We suspect the market will follow a similar pattern [to the 2003 SARS outbreak] and will recover rapidly when there is evidence that the number of new cases has peaked...If the market does move to fresh lows, we expect it will only hold those levels briefly and rebound sharply on the first indications that the number of new cases of infection has peaked."

- Andrew Graham, Head of Asia, Martin Currie


Definitions:

U.S. Treasuries are direct debt obligations issued and backed by the "full faith and credit" of the U.S. government. The U.S. government guarantees the principal and interest payments on U.S. Treasuries when the securities are held to maturity. Unlike U.S. Treasury securities, debt securities issued by the federal agencies and instrumentalities and related investments may or may not be backed by the full faith and credit of the U.S. government. Even when the U.S. government guarantees principal and interest payments on securities, this guarantee does not apply to losses resulting from declines in the market value of these securities.

Structured credit investments include collateralized bond obligations (CBOs), collateralized debt obligations (CDOs), syndicated loans and synthetic financial instruments.  A CBO is understood to be of investment grade, but is backed with the use of a pool of below-investment-grade bonds. CDOs are a kind of asset-backed security, holding a pool of collateralized debt, such as mortgages and auto loans, that may be subdivided into various tranches representing different levels of risk.  A syndicated loan is a loan offered by a group of lenders (called a syndicate) who work together to provide funds for a single borrower. Synthetic financial instruments are artificially created investment vehicles or instruments intended to meet requirements not met by existing, conventional instruments. They are designed to reduce risk, increase diversification or offer a higher return. A synthetic floating rate instrument can be produced by combining a fixed-rate bond and an interest rate swap. Or an asset with the same risks and rewards as the underlying share can be created by the purchase of a call option and the simultaneous sale of a put option on the same share.

Corporate credit refers to corporate bonds.

One basis point (bps) is one one-hundredth of one percentage point (1/100% or 0.01%).

Capital expenditures (Capex) , also called capital spending, is an amount spent by a company to acquire or upgrade productive assets (such as buildings, machinery and equipment, vehicles) in order to increase the capacity or efficiency of a company for more than one accounting period

A pandemic is the worldwide spread of a new disease.

The Federal Reserve Board ("Fed") is responsible for the formulation of U.S. policies designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments.

The federal funds rate (fed funds rate, fed funds target rate or intended federal funds rate) is a target interest rate that is set by the FOMC for implementing U.S. monetary policies. It is the interest rate that banks with excess reserves at a U.S. Federal Reserve district bank charge other banks that need overnight loans.A cyclical stock refers to an equity security whose price is affected by macroeconomic, systematic changes in the overall economy. Cyclical stocks are known for following the cycles of an economy through expansion, peak, recession, and recovery.

COVID-19 is the World Health Organization's official designation of the current coronavirus.

Emerging markets (EM) are nations with social or business activity in the process of rapid growth and industrialization. These nations are sometimes also referred to as developing or less developed countries.

Gross Domestic Product (“GDP”) is an economic statistic which measures the market value of all final goods and services produced within a country in a given period of time.

Growth stock refers to the stock of a company whose earnings are expected to grow at an above-average rate relative to the market.

The Organization of the Petroleum Exporting Countries (OPEC) is a permanent intergovernmental organization of 12 oil-exporting developing nations that coordinates and unifies the petroleum policies of its member countries.

OPEC+ includes the 11 OPEC members and 10 non-OPEC nations.

Severe acute respiratory syndrome (SARS) is a viral respiratory illness caused by a coronavirus called SARS-associated coronavirus (SARS-CoV). SARS was first reported in Asia in February 2003. The illness spread to more than two dozen countries in North America, South America, Europe, and Asia before the SARS global outbreak of 2003 was contained.

Value stock refers to the stock of a company that is believed to trade at a lower price relative to its fundamentals (i.e. dividends, earnings, sales, etc.).

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