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juin 05, 2020
Coronavirus: Who is the ‘Smart Money’ Investor?
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juin 05, 2020

Coronavirus: Who is the ‘Smart Money’ Investor?


PATH

Coronavirus: Who is the ‘Smart Money’ Investor?

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juin 05, 2020

 
 

Equity markets have recently risen in the face of significant scepticism – the proverbial ‘wall of worry ’– but equity positioning data suggest that many institutional investors, notably asset managers and pension funds, have above-average cash balances and are missing the ‘party’. In fact, despite risk assets and equities in particular appearing to have an upward bias, we have actually seen flows out of equity funds .

May was another positive month for global equities relative to bonds, although the price action was less exciting than in late March and April. Nevertheless, with institutional investors by and large sitting on the sidelines, it appears that individual investors are providing the bulk of the support for equities, begging the question of which group of investors is right – who is the ‘smart money’ investor?

 
 

Markets are clearly anticipating economic recovery and are looking through the enormous, astonishing levels of economic disruption that have resulted from the COVID-19 crisis, for example as demonstrated by record levels of unemployment. Moreover, in the absence of a coherent, coordinated response to the virus, countries and regions are at different stages in the control of the virus; the risk of reinfection therefore remains high, and we have already seen second waves of infections in regions that appeared to have effectively resolved the viral threat. So far, these second waves have been reasonably well contained, but premature re-opening in regions where the virus is still spreading, in the hope of limiting the economic damage, risks major setbacks and forced re-closures, as hospital facilities become overwhelmed. Should this happen, it could quickly derail the economic recovery story.

Bankruptcy rates, a primary concern for the global economy, are likely to increase sharply in coming quarters.  One broad indicator of the pace of bankruptcies in the US, where a strong recovery is critical to global recovery, is the American Bankruptcy Institute’s (ABI) count of US commercial business bankruptcy filings. Encouragingly, the latest ABI data show that Chapter 7 bankruptcies declined in April on a year-on-year basis, suggesting that bankruptcies in smaller firms have not yet seen an uptick. However, the ABI observed that whilst “the extraordinary measures taken by Congress and the Administration …. have likely staved off bankruptcy filings to date, as financial challenges continue to escalate amid this crisis, bankruptcy is sure to offer a financial safe harbor from the economic storm.1” Furthermore, in May, Google searches for the term ‘bankruptcy’ rose to their highest level since 2012; Google searches have historically led the ABI data, another reason to believe that more US bankruptcies are likely2.

In Europe, we expect defaults to rise in Q3 2020, as recent government exemptions have allowed insolvent firms to delay filing for bankruptcy until September. Moreover, there are already other indications of stress for small businesses - according to European lobby group SMEunited, 90% of small and medium enterprises in Europe have reported being economically affected by COVID-19, with services hardest hit3.

So in light of these potential issues, who is the “smart money” investor? Those investors who have ridden the rebound since March’s collapse in equity prices, or the majority of institutional managers who have remained defensively positioned?  In seeking to evaluate which group is correctly positioned, one consideration is the aggregate actions of company CEOs and CFOs, who are arguably in the best position to evaluate the prospects of their respective businesses. In this context, we are currently seeking to understand why US corporations have issued record amounts of shares and of corporate debt. Could this indicate that company prospects have diminished to the extent that current pricing looks attractive, while before the coronavirus higher equity prices were not attractive enough to justify large equity issuance? If so, this suggests there may be room for prices to fall.  Similarly, high debt issuance now may suggest management concerns that investor appetite for their debt will fall in the future, indicating a less favourable business outlook. From this perspective, the more defensive institutional managers may prove to be ‘smarter’ in the end!

Asset allocation changes

Our risk-targeted approach takes into account current levels of volatility, which have been falling. Therefore, whilst our fundamental outlook tells us it is still too early to move decisively back into risk assets, this week we have modestly increased our risk positioning, while remaining defensive overall. Crucially, we have implemented the bulk of this modest increase in risk assets via fixed income credit asset classes, in accordance with our latest tactical preferences.

Our analysis of US high yield spreads suggests that default risk has been priced in by credit markets. Consequently, this week we have upgraded US high yield from underweight to neutral. We have also added to European high yield, US investment grade and EM Sovereign Debt, not because we have changed our view, but rather as we increased risk via credit we also added to these positions.

Finally, this week within equities, we upgraded Brazilian equities to overweight. Despite a relatively strong month, as of 31 May Brazilian equities were the worst-performing asset class at a country level, year-to-date. They continue to see significant relative downward revisions to earnings. We think consensus is too bearish on the earnings outlook and expect Brazilian equities to outperform in the months ahead. The key to the outlook is Brazil’s exports to China. The improvement in the Chinese economy boosts imports of Brazilian products, whilst continuing trade tensions with the US favour Brazil’s soya bean industry.

 
 
 
Tactical Preferences
We have provided an overview of our latest tactical views below:
 

Source: MSIM GBaR team, as of 3 June 2020. For informational purposes and does not constitute an offer or a recommendation to buy or sell any particular security or to adopt any specific investment strategy. The tactical views expressed above are a broad reflection of our team’s views and implementations, expressed for client communication purposes.

 
 

 

1 Where markets appear to ignore a large number of negative factors and keep rising.

2 Almost $160bn in outflows from equity mutual funds YTD 20 May 2020. Data is from the Investment Management Institute.

3 American Bankruptcy Institute. www.abi.org/newsroom/press-releases/total-april-bankruptcy-filings-fall-46-percent-over-last-year-commercial

4 Google Trends. https://trends.google.com/trends/explore?date=2007-05-01%202020-06-01&geo=US&q=%2Fm%2F01hhz  and www.goldmansachs.com/insights/pages/daunting-debt-dynamics-f/report.pdf

5 SMEunited. smeunited.eu/news/a-view-on-the-covid-impact-on-and-support-measures-for-smes

 
 

RISK CONSIDERATIONS

There is no assurance that the Strategy will achieve its investment objective. Portfolios are subject to market risk, which is the possibility that the market values of securities owned by the portfolio will decline and that the value of portfolio shares may therefore be less than what you paid for them.  Market values can change daily due to economic and other events (e.g. natural disasters, health crises, terrorism, conflicts and social unrest) that affect markets, countries, companies or governments. It is difficult to predict the timing, duration, and potential adverse effects (e.g. portfolio liquidity) of events.  Accordingly, you can lose money investing in this portfolio. Please be aware that this strategy may be subject to certain additional risks. There is the risk that the Adviser’s asset allocation methodology and assumptions regarding the Underlying Portfolios may be incorrect in light of actual market conditions and the Portfolio may not achieve its investment objective. Share prices also tend to be volatile and there is a significant possibility of loss. The portfolio’s investments in commodity-linked notes involve substantial risks, including risk of loss of a significant portion of their principal value. In addition to commodity risk, they may be subject to additional special risks, such as risk of loss of interest and principal, lack of secondary market and risk of greater volatility, that do not affect traditional equity and debt securities. Currency fluctuations could erase investment gains or add to investment losses. Fixed-income securities are subject to the ability of an issuer to make timely principal and interest payments (credit risk), changes in interest rates (interest-rate risk), the creditworthiness of the issuer and general market liquidity (market risk). In a rising interest-rate environment, bond prices may fall and may result in periods of volatility and increased portfolio redemptions. In a declining interest-rate environment, the portfolio may generate less income. Longer-term securities may be more sensitive to interest rate changes.Equity and foreign securities are generally more volatile than fixed income securities and are subject to currency, political, economic and market risks. Equity values fluctuate in response to activities specific to a company. Stocks of small-capitalization companies carry special risks, such as limited product lines, markets and financial resources, and greater market volatility than securities of larger, more established companies. The risks of investing in emerging market countries are greater than risks associated with investments in foreign developed markets.  Exchange traded funds (ETFs) shares have many of the same risks as direct investments in common stocks or bonds and their market value will fluctuate as the value of the underlying index does. By investing in exchange traded funds ETFs and other Investment Funds, the portfolio absorbs both its own expenses and those of the ETFs and Investment Funds it invests in. Supply and demand for ETFs and Investment Funds may not be correlated to that of the underlying securities. Derivative instruments can be illiquid, may disproportionately increase losses and may have a potentially large negative impact on the portfolio’s performance.  A currency forward is a hedging tool that does not involve any upfront payment. The use of leverage may increase volatility in the Portfolio. Diversification does not protect you against a loss in a particular market; however, it allows you to spread that risk across various asset classes. 

 
andrew.harmstone
Managing Director
Global Balanced Risk Control Team
 
manfred.hui
Managing Director
Global Balanced Risk Control Team
 
christian.goldsmith
Executive Director
 
 
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Who is the ‘Smart Money’ Investor? [Audio]
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Christian Goldsmith shares the GBaR team’s latest market views with a focus on the impact of coronavirus.
 
 
 
 

INDEX DEFINITIONS

The indexes shown in this report are not meant to depict the performance of any specific investment, and the indexes shown do not include any expenses, fees or sales charges, which would lower performance. The indexes shown are unmanaged and should not be considered an investment. It is not possible to invest directly in an index.

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The views and opinions are those of the author as of the date of publication and are subject to change at any time due to market or economic conditions and may not necessarily come to pass. Furthermore, the views will not be updated or otherwise revised to reflect information that subsequently becomes available or circumstances existing, or changes occurring, after the date of publication. The views expressed do not reflect the opinions of all portfolio managers at Morgan Stanley Investment Management (MSIM) or the views of the firm as a whole, and may not be reflected in all the strategies and products that the Firm offers.

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