COVID-19 Update from the Global CIO
The thought of an invisible enemy that spreads easily and carries a non-trivial mortality rate sends shivers down most people’s spine. COVID-19 has been such an enemy and is slowing down the global economy with people moving into hiding. We have not witnessed a global health emergency of this magnitude since the Spanish Flu pandemic in 1918.
The financial predicament we are dealing with has elements similar to the 1987 crash, the 1998 economic fallout stemming from the failure of Long Term Capital Management (LTCM), the terrorist attacks of 9/11 in 2001 and the Global Financial Crisis of 2008. Like the 1987 crash, stock markets are falling at a breathtaking pace. In 1987, portfolio insurance schemes added fuel to the fire on the downside and today, constant volatility and risk parity approaches act in a similar fashion by shedding positions as volatility increases. Like the 1998 LTCM fallout, highly levered funds are forced to sell into an illiquid market. Like 9/11, the enemy is unknown and breeds fear and uncertainty with people scared to travel. Like 2008, markets are frozen and liquidity is very limited because good collateral is lacking in an environment of fear, uncertainty and solvency threats.
We can be optimistic that the effects of the virus will pass and life will go back to normal at some point. The key question is when. Chinese society seems to be on a path to normality after a complete economic halt for 6 weeks. Odds are it will be longer for the rest of the world, though maybe not significantly longer.
We can also be optimistic that the authorities have learned how to reduce the pain of crises like 1987, 1998, 2001 and 2008 with central banks that act fast and provide liquidity. The solvency aspect, similar to 2008, is what keeps credit markets frozen. We are seeing the initial signs of fiscal plans to temporarily plug the cash flow hole from inactivity in the economy to reduce solvency risks. This can only be temporary and has limits. The key question that remains is how long inactivity will be required to stop the propagation of the virus or when will we find an adequate remedy for people to be confident enough to go back to work and for society to return to normal.
Markets currently appear to be pricing a slowdown in the economy. The medium-term repercussions are difficult to ascertain but we should remain confident that the economic machine may be down but not out.
For now, we are not making changes to our tactical asset allocation position because uncertainty prevails and the cost of trading is excessive but we will be looking to adapt to the environment as events occur.
François Bourdon, FCIA, FSA, CFA, PRM
Global Chief Investment Officer
Fiera Capital Corporation
Fiera Capital Corporation is a global asset management firm with affiliates in various jurisdictions (collectively, “Fiera Capital”). The information and opinions expressed herein relate to Fiera Capital’s investment advisory services and investment funds and are provided for informational purposes only. It is subject to change and should not be relied upon as the basis of any investment or disposition decisions. While not exhaustive in nature, these Important Disclosures provide important information about Fiera Capital and its services and are intended to be read and understood in association with all materials available on Fiera Capital’s websites.
Past performance is no guarantee of future results. All investments pose the risk of loss and there is no guarantee that any of the benefits expressed herein will be achieved or realized. Valuations and returns are computed and stated in Canadian dollars, unless otherwise noted. The information provided herein does not constitute investment advice and should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell any security or other financial instrument. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. There is no representation or warranty as to the current accuracy of, or responsibility for, decisions based on such information. Any opinions expressed herein reflect a judgment at the date of publication and are subject to change. Although statements of fact and data contained in this presentation have been obtained from, and are based upon, sources that Fiera Capital believes to be reliable, we do not guarantee their accuracy, and any such information may be incomplete or condensed. No liability will be accepted for any direct, indirect, incidental or consequential loss or damage of any kind arising out of the use of all or any of this material.
Certain information contained in this material constitutes “forward-looking statements,” which can be identified by the use of forward-looking terminology such as “may,” “will,” “should,” “expect,” “anticipate,” “project,” “estimate,” “intend,” “continue,” or “believe” or the negatives thereof or other variations thereon or comparable terminology. Due to various risks and uncertainties, actual events or results, including actual performance, may differ materially from those reflected or contemplated in such forward-looking statements.
Views expressed regarding a particular company, security, industry or market sector should not be considered an indication of trading intent with respect to any funds or accounts managed by any Fiera Capital entity.
Each Fiera Capital entity provides investment advisory services or offers investment funds only in those jurisdictions where such entity and/or the relevant product is registered or authorized to provide such services pursuant to an applicable exemption from such registration. Thus, certain products, services, and information related thereto provided in the materials may not be available to residents of certain jurisdictions. Please consult the specific disclosures relating to the products or services in question for further information regarding the legal requirements (including any offering restrictions) applicable to your jurisdiction. For details on the particular registration of, or exemptions therefrom relied upon by, any Fiera Capital entity, please consult this webpage.
Important risk factors
Emerging Markets risks – an investment in emerging markets may be subject to greater risk due to investing in emerging market countries, which may introduce greater volatility and political, economic, and currency risks, as well as differences in accounting methods.
Non-Investment Grade Credit risks – an investment in non-investment grade credit may be subject to greater risk due to investing in low-rated or low-investment grade debt securities, which may introduce greater liquidity and counterparty default risks.
Alternative Investments risks – Alternative investments are speculative and involve a great deal of risk and are not suitable for all investors. There can be no assurance that a manager’s strategy or target objective will be successful. The overall performance of the strategy is dependent not only on investment performance but also on a manager’s ability to source assets. Investment return and principal value will fluctuate so that an investor’s units, if and when redeemed, may be worth more or less than original cost. The fees and expenses charged within the strategy may offset its total return. Exposure to currency fluctuations may have an impact on such strategy’s cash flow and asset values denominated in the currency of domicile. The use of leverage could increase the risks of an investment. Portfolio investments may be subject to high levels of regulation which could result in risks related to delays in obtaining relevant permits or approvals. Investors should be aware that there will be instances where the Fiera Capital entities and/or their clients will experience actual conflicts of interest associated with the management of one or more strategies.