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COVID-19 Update Overview COVID-19 Update 03rd April 2020 Overview With the ongoing situation around the Covid-19 pandemic, all of our lives are currently being impacted. Governments around the world have imposed some form of lockdown to contain the spread of the pandemic. Financial markets are not being spared. Central Banks have intervened with monetary and fiscal measures aimed at shoring up the state of the global economy. Table 1 provides an overview of the performance of the major markets. As can be seen, equity markets have been significantly down since the onset of the crisis, ranging from -9.8% across China, -20.0% across the US (S&P500) and -26.5% across France. The YTD performance was mitigated by a strong rebound seen during the last week of March (see our “Dead Cat Bounce” section later in this article). Oil prices fell significantly over the quarter with a YTD performance of -66.5%, largely in part due to the price war between Saudi Arabia and Russia as well as the decreased global demand due to several areas of the world going into confinement. Undoubtedly volatility spiked with the VIX, an indicator of perceived risk in the markets, reaching levels higher than those seen during the financial crisis of 2008. Since Since Index 23-Mar-20 19-Feb-20 YTD 1Y 3Y 5Y 10Y S&P 500 15.5% -23.7% -20.0% -8.8% 9.1% 23.9% 120.3% Dow Jones 17.9% -25.3% -23.2% -15.5% 5.7% 21.9% 100.9% Nasdaq 12.2% -21.6% -14.2% -0.4% 30.2% 55.6% 219.4% UK 13.6% -23.9% -24.8% -22.1% -23.0% -17.7% 0.0% France 12.3% -28.1% -26.5% -17.8% -13.6% -13.5% 10.3% China 3.4% -7.6% -9.8% -11.0% -14.3% -27.4% -12.1% MSCI World (TR) 15.8% -23.5% -21.1% -10.4% 5.5% 16.2% 88.9% MSCI Europe (TR) - USD 16.5% -24.4% -24.3% -15.5% -7.0% -7.8% 28.4% MSCI EM (TR) 12.0% -22.9% -23.6% -17.7% -5.9% -1.2% 7.2% IG Index 2.2% -1.5% -3.4% -0.1% 9.2% 8.7% 17.4% EUR / USD 2.8% 2.1% -1.6% -1.7% 3.3% 1.8% -17.8% MUR / USD -0.1% -4.6% -7.4% -11.0% -9.8% -6.8% -21.7% MUR / EUR -2.9% -6.5% -6.1% -9.8% -12.8% -8.3% -4.9% Gold 1.5% -2.1% 3.9% 22.0% 26.9% 33.0% 42.9% Oil -12.3% -61.6% -66.5% -65.9% -59.3% -57.9% -75.1% VIX -13.1% 272.3% 288.5% 290.5% 364.0% 269.0% 212.6% Table 1 – data as of 31st March 2020 A: 6/7th Floor, Dias Pier Building, Le Caudan Waterfront, Caudan, Port Louis 11307, Mauritius T: (230) 405 4000 F: (230) 211 9833 W: axysinvestmentpartners.com BRN: C12113032 COVID-19 Update P/E Prior to the onset of the Covid-19 P/E as of P/E as of End 2008 pandemic and the effect it would Index 30-Mar-20 End 2019 Crisis Est. P/E Hist. P/E have on the financial markets, we S&P 500 16.3 21.3 11.1 15.9 17.8 had mentioned that valuation levels Dow Jones 14.9 20.3 12.0 15.0 16.0 had reached historical highs. Our Nasdaq 46.4 54.7 21.4 22.3 32.2 Investment and Risk Management UK 15.7 21.6 20.3 11.6 23.4 Committees discussed at length the France 15.3 21.7 10.5 12.5 19.0 potential decoupling of company China 13.0 14.3 20.2 10.4 15.6 fundaments on one side against their MSCI World (TR) 15.7 20.7 11.0 14.7 18.1 valuation levels on the other hand. MSCI Europe (TR) - USD 15.8 21.1 15.2 13.0 19.7 However, with Covid-19 acting as MSCI EM (TR) 11.7 15.6 8.1 11.2 13.7 catalyst, most equity indices have Table 2 - as of 31 st March 2020 had their valuation metrics trending back to their historical averages as can be seen in Table 2. Given the impact of the confinement across several countries to contain the spread of Covid-19, we expect these valuation multiples to face further downward pressure. When can History teach us: 1) The Speed of this Crash The velocity at which the markets tumbled was not seen since 1929. Although the first 18 days of this market downfall was not as quick as what happened in 1929, the downside move experienced by the equity markets in the first 30 days since the onset of this crisis has been unprecedented. Graph 1 illustrates the cumulative performance of the Dow Jones during the first 30 days of different crisis. 2) The “Dead Cat Bounce” As explained in our previous Covid-19 Update issued last week, we highlighted that we did not believe that the rebound in the equity markets was warranted. The “Dead Cat Bounce” as illustrated by the circles in Graph 2 are common phenomenon during market stresses. It relates to a behavioural bias from financial participants who are often ill-advised that the bottom of the markets had been reached. This results in buying pressure from market participants before the markets correct again. Another phenomenon seen in this particular crisis which resulted in further buying was the rebalancing of portfolios done by large financial institutions as at Q1-2020 to maintain their strategic asset allocation. This resulted in a momentary rebound in the equity markets over the last few days. Cumulative Performance of the Dow Jones since the Illustration: "Dead Cat Bounce" start of a Crisis 105 105 100 100 95 95 90 90 90.82 85 85 84.13 80 80 77.03 77.03 75 75 76.08 76.08 70 70 Cumulative Performance Cumulative Cumulative Performance Cumulative 65 65 60 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 60 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 Number of Days Number of Days 1929 Tech Bubble 2008 Covid-19 1929 Covid-19 Graph 1 Graph 2 A: 6/7th Floor, Dias Pier Building, Le Caudan Waterfront, Caudan, Port Louis 11307, Mauritius T: (230) 405 4000 F: (230) 211 9833 W: axysinvestmentpartners.com BRN: C12113032 COVID-19 Update 3) The US 2YR-10YR curve inversion The spread between the US2YR and US10YR yields are at precariously low levels. Markets participants have often used this US2YR-10YR spread as a leading indicator of an upcoming recession. We are now in a territory where the market could potentially be forecasting a recession. Whilst the US2YR-10YR yield curve is not inverted yet, the market will be monitoring this spread to gauge whether a recession is forthcoming. We illustrate in Graph 3 what history has taught us about the link between US2YR- 10YR spreads and recessions. Graph 3 Economic Picture & Outlook We note with concern that there has been a significant increase in the number of unemployed people in the Weekly: No of Americans seeking Unemployment Benefits (in '000) US. The number of Americans applying for 7,000 unemployment benefits reached a historical high of 3.3 6,000 million in as of a fortnight ago, and peaked further at 6.6 million last week. Graph 4 illustrates such numbers 5,000 are unprecedented and are figures not reached during 4,000 previous crisis. 3,000 2,000 Furthermore, whilst we will not proclaim to be medical 1,000 experts, we note with further concern that the number 0 of people infected with Covid-19 has reached a milestone figure of 1 million cases across the world. Graph 4 The is currently no visibility unfortunately as to when this situation will subside, even though around 3 billion people globally are in a form of sanitary confinement. This does not bode well for the economic outlook as highlighted in our previous newsletter in which we detailed our views on the supply and demand shocks to various sectors of the economy. Any form of economic recovery will depend on how the world emerges from the Covid-19 pandemic. It is too early for us, based on the information at hand, to understand the course of an economic recovery despite the different monetary and fiscal measures undertaken by Central Banks around the world. For this reason, we believe it may be premature to invest fully in equity markets at this stage. A: 6/7th Floor, Dias Pier Building, Le Caudan Waterfront, Caudan, Port Louis 11307, Mauritius T: (230) 405 4000 F: (230) 211 9833 W: axysinvestmentpartners.com BRN: C12113032 COVID-19 Update Is Gold a safe Haven? As highlighted in our previous communication, our Investment and Risk Management Committees had already reduced our Equity exposure prior to the onset of the Covid-19 pandemic following our opinion that valuation metrics were overvalued. We further reshuffled our Fixed Income exposure over the last few weeks. We illustrate here the performance of Gold during prior crisis. We are of the opinion that Gold has acted as a safe haven asset during times of market stresses.
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