Positioning for yield in time for a global restart
As liquidity conditions improved, our portfolio manager shares how we are positioned for income opportunities across asset classes.
A tough test for global economic resilience
The fast-spreading disease is likely to severely damage global growth in the first half of 2020. Already, it has hurt China’s consumption and manufacturing production, as reflected by the Purchasing Managers’ Index4, and the social distancing policies4 are significantly impacting the service sector in the US and Europe.
Central banks have acted swiftly and are implementing aggressive policies including asset purchases and liquidity injections to offset the economic fallout and restore financial stability. Many governments have also rolled out sizeable stimulus packages to support businesses and low-income families. In China, the economy is expected to gradually recover as the number of new infections decline and production resumes.
Against the current backdrop, we believe a gradual global economic recovery in late 2020 is likely. And the strength of the economic rebound will be determined by the duration of the pandemic and the effectiveness of policy stimulus.
Global growth may worsen before improving, and risk aversion could persist. And diversification1 among asset classes of varying risk profiles can reduce portfolio volatility.
The correlation between equities and government bonds in the US and developed economies is shown in the charts. In most cases, the relationship is negative, which implies equity and bond prices typically move in opposite directions. This relationship underpins the principle of diversification1.
During the recent stock market sell-off, the negative correlation between equities and fixed income temporarily broke down due to a liquidity squeeze. We expect this relationship to resume once liquidity in the fixed income market normalises.
Correlations between stocks and sovereign bonds5
Past performance is not a reliable indicator of current and future results.
Targeting quality assets
As investors grapple with the economic impact on consumption and manufacturing disruptions, adopting a more defensive bias in asset allocation could be optimal.
Number of companies yielding greater than 3% by region6
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Market volatility could continue to spike, correlating with the number of new infections. A well-diversified1 portfolio with a defensive bias could help build portfolio resilience while seeking potential yield3 opportunities.