Parts of Asia and Europe are probably ahead of the United States in terms of experiencing COVID-19, but when it comes to the economic fallout the world might be moving in lockstep for now.
Financial services industry representatives from Hong Kong, Italy and the U.S. drove home the point that investors are confused and looking for direction, during anwebcast on Tuesday.
“We have seen a lot of interest in Asian equities, and from our perspective that doesn’t stack up,” said Isaac Poole, chief investment officer at Oreana Financial Services in Hong Kong.
Poole, who said many of the businesses in Hong Kong had been encouraging employees to work from home beginning in October 2019 due to widespread protests that were blocking streets and disrupting commutes, said firms need to embrace an “educational drive to prevent investors from making knee-jerk reactions.”
“When you have sell-offs in risk assets you start to get a really big interest in absolute-return strategies and hedge funds that can offer downside protection,” he said. “But it tends to come well after the fact and can be destructive, which is why I’m suspect of those sorts of moves.”
Jason Draho, U.S.-based head of asset allocation Americas at UBS Wealth Management, said, “People are focused on where the opportunities are,” but he also sees investors “looking to add downside protection.”
The trouble with downside protection strategies — especially in the middle of a pandemic that could trigger a global recession — is that it is comparable to trying to buy flood insurance when your house is already under water.
“Option-based strategies and hedging became very expensive,” Draho said.
Even though some equity indexes and global markets have started to show signs of stabilization following the extreme drop in March, there is concern that investors will be making rash decisions as the global economy struggles to find its footing.
“From an investment perspective, we had already developed a negative view of the world through 2019 and thought we were already facing a deep, protracted recession,” said Poole. “Large parts of China and Asia had already slowed down, and we thought there would likely be a slowdown in 2020, globally.”
And that analysis was done before the coronavirus was known to be a highly contagious and deadly virus that would infect large swaths of the globe.
In hard-hit Italy, where more than 17,000 people have died from the virus, the confusion is just beginning, from an economic perspective, according to Mariano Gambaro, head of advisory at Banca Finnat.
“We are very close to the end of the virus, but we believe the worst of the economic factor is still coming,” he said.
In terms of allocation assets, Gambaro said he is leaning more heavily on risk and hoping for a comparable reward.
“We’re placing more attention on the emerging markets and areas where there is much more chance to grow,” he said. “The impact (of a stock market rebound) will be very strong everywhere, but in emerging markets it will be stronger.”
Poole and Draho, meanwhile, are less definitive about how to move forward and when to move at all.
“This has been a rapid and unprecedented sell-off and I’m not getting a lot of clarity around the impact on balance sheets,” said Poole. “We could have a V-shaped recovery, but the probability of that is decreasing. There’s also a strong chance the recent rallies off the bottoms are not pricing in the risk that this is going to be worse on balance sheets, and any guidance from companies will be painted with uncertainty.”
Draho is also calling any hopes for a V-shaped economic recovery “optimistic” and is expecting a slower U-shaped bounce back.
“The markets are pricing a scenario where (the virus peaks) in the next few weeks, but what happens once you get past the peak and businesses start to reopen?” he said. “We could see another 10 million job losses and an unemployment rate in low teens is quite likely.”
“Very few of us have experienced this in our lifetimes, and there are things that are difficult to forecast,” Draho added. “The lessons we’ve learned is to be humble about our ability to forecast and be more robust in terms of how portfolios will respond in these types of situations.”