The Chinese word Wēijī (危機) is commonly mistranslated as meaning both “crisis” and “opportunity” and whilst this is a mistranslation it doesn’t make the lesson behind such a mistranslation any less interesting or useful. There is always opportunity to be found in a crisis. While the tragedy of the Coronavirus rages around the world and throws up many unknowns, we can be sure that wise investors will be maintaining (if not increasing) market exposure as the frontline defence in maintaining their financial health.
Following the exceptionally sharp drops in global markets over the last two months, last week saw some respite as global equities rose +4.5% in GBP terms, as measured by the MSCI ACWI. They had been up over +10% until Friday when they pared back gains. We expect markets to remain volatile to the upside and downside, hence retaining market exposure is key to capturing both aspects.
While almost all asset classes fell in value during the depths of the selloff, High Quality global bonds are up +0.7% for the year to date, as measured by the Barclays Global Aggregate GBP Hedged. You may remember that last July we switched our Fixed Income focus to this and away from Sterling bonds as we became more bearish of the late cycle environment. We are pleased with the result, as the Sterling Non-Gilt Index has returned -3.6% for the year to date.
While a negative overall return is always a disappointment, for the reasons above, we are in a good position versus peers to cautiously re-deploy the client capital we have preserved into sections of the market where value and opportunity likely resides. The High Yield Bond market is now the cheapest it has been since the financial crisis and, while we were not previously comfortable with valuations, it is now likely that multiple babies in the High Yield space have been thrown out with the bathwater. We have high conviction in the High Yield Fund Manager we are deploying to take a highly active and selective approach to uncover value and drive future expected returns.
