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Hedley Market Commentary - April 2020

Market Commentary – April 2020


By Neil Worsley, Investment Strategist


As global equity markets tumbled through March it’s interesting to note that one of the few safe havens for investors were government bonds and this despite the enormous issuance which is about to hit markets as governments across the world attempt to underwrite and shore up their economies.

With the Bank of England among a number of Central Banks to reduce interest rates in its effort to fight the oncoming downturn, yields on benchmark British government bonds turned negative for the first time ever as investors rushed to the safety of gilts to protect themselves against the feared economic shock of the coronavirus. The yields on benchmark gilts - used as yardsticks for pricing other debt - turned negative for two, three, four, six and seven-year maturities and fell to 0.13% for 10 years, in effect meaning investors are willing to lose money in exchange for the safety of parking their cash in most British government debt. Moving in the opposite direction were corporate and other debt instruments which saw a very sharp drop in price and a huge rise in yields as investors ditched these as panic set in. The record low borrowing costs will certainly make it easier for the UK Chancellor to increase public spending without ‘breaking the bank’ in interest repayments and just as well as the Debt Management Office has just announced that it plans to raise £45bn in April alone. We have never seen debt issuance on such a scale before, which requires the Bank of England to be constantly acting as buyer of last resort to ensure that it all gets mopped up: But what about investors on the other side of this trade?

Over the past 30 years the average return on the S&P 500, assuming all dividends were reinvested, was just under 10%. If we assume that stocks can deliver similar returns over the next 30 years, then an ‘old fashioned’ income portfolio with 70/30 mix of stocks and bonds (which now yield practically nothing) would be 7%. There are a lot of assumptions here, but it at least draws on historic outcomes which is as reliable as any other forward-looking data. If we then adjust the bond return of nothing to account for inflation (and who knows where this might end up?) then an investment in government bonds, be it US or UK, has a negative real yield of around -1.5%. With these sorts of numbers you are investing to (almost) certainly lose money over the medium and longer term. While government bonds certainly mitigate loses in times of crises, the like of which we are now seeing, spare a (very small) thought for poor portfolio managers who are asked to produce an above average income portfolio to include a bond allocation which have extremely low yields. This is a tough ask even for seasoned professionals.

I would just like to share with you a chart (courtesy of JPMorgan) showing the countries which will be most economically affected by the impact of Coronavirus, even those with relatively few cases, as global demand for goods and services collapses.



As we can see from the above chart, the economies most impacted are a broad mix of developed and developing nations spread right across the globe. It is worth pointing out that Mexico is likely to be worst hit because of its exposure to the US market and not forgetting the UK which, happily, doesn’t make this list but where it is forecast to contract by 3.7%, but all these figures are all purely guesswork for now.


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