Spreads have moved from historically narrow levels straight to recessionary wides. It is time to buy.
What a difference one quarter can make. “In December we observed an equity market bubble continuing to inflate and a sustained late-cycle search for yield in credit,” says Victor Verberk, Co-head of the Robeco Credit Team. “Today we face a certain and severe global recession, an equity market crash and spreads that have moved from the historical tights straight to recessionary wides.”
As he puts it in Robeco’s latest Credit Quarterly Outlook: “The world now has a common enemy. We have to join forces to beat the virus and avoid deep economic downturn. Authorities will provide fiscal and monetary support for the private sector. Governments and banks will need to work side by side to contain the fallout.”
The short term will be economically challenging, with market pain and many market participants scrambling for cash and withdrawals. But Verberk says the Robeco Credits team is of the view that markets will try to look forward, through the stimulus and beyond stabilization in COVID-19 infections.
The longest economic expansion has ended abruptly. The end of the expansion itself is not a surprise; but the nature of the exogenous shock, its speed and the magnitude of the slowdown is. “History is being made. But while COVID-19 is the proximate trigger, we firmly believe current events are not just about the virus. They have deep secular and cyclical roots.”
Sander Bus, Co-head of the Robeco Credit Team, explains how we got to this stage: “We discussed the debt super-cycle in a number of previous Credit Quarterly Outlooks. Many global imbalances, such as the rise in Chinese private sector debt from just USD 4.5 trillion before the global financial crisis to USD 30 trillion today, have been building for years. At minus USD 11 trillion, the US net international investment position is five times more extreme than it was before the global financial crisis. Social inequality has risen to levels not seen since the 1920s.”
A build-up of imbalances emerged in this expansion, the result of 11 years of risk accumulation. “Central bank policy, which was too easy at times (e.g. 2014-17), fueled an equity bubble and deterioration in lending standards. Many open economies, such as Germany and Japan, had already weakened before 2020, hurt by mercantilism and trade tensions.”
This unusual combination of market excesses and real economic fragility left both economies and markets vulnerable to a negative shock. No one knows ahead of time what the exogenous shocks and proximate triggers for crashes would be. If they were known, they would be priced in and there would be no crash.
“There is no doubt about the proximate trigger this time,” Bus says. “A global recession is now inevitable and could be as severe as during the global financial crisis, when US GDP fell nearly 4% year on year. Credit spreads are already compensating for a deep recession.”
In this bear market, everything is happening at a faster speed – including the policy response from monetary and fiscal authorities. Jamie Stuttard, Robeco Credit Strategist, believes that authorities have learned from the 2008 experience and are evidently prepared to go further and faster. “We will see a transfer of risk from the private sector to the public sector at the expense of huge fiscal deficits, funded by central banks amid increased asset purchase programs. Such public sector risk sharing is exactly what stopped the 2008 crisis, and is needed again.”
He points out that the costs will be huge, though, and the long-term question is: who will pay the bill? “Will the costs fall on the public sector and translate into a special ‘corona tax’ in coming years or will the private sector bear the burden?”
Stuttard expects that this will probably differ by country, depending on the inclination of governments to accept or prevent corporate failures amid the most vulnerable credits.
It is still uncertain when the global economy will be restarted. COVID-19 is still spreading rapidly and we have not yet seen the peak. As long as the end of corona is not in sight, markets will probably remain extremely volatile, Verberk says. “That said, markets will try to look through all the misery and will slowly price the right COVID-19 premium.”
In short, the fundamentals are clearly weak. “A deep recession and lots of uncertainty will be with us for some time. But it is evident that we are in the phase of fear, panic and loathing. Regarding policies to soften the blow, expect fiscal support of over USD 1 trillion in each major economic region,” according to Verberk.
On positioning, he points out: “We are known not only for our conservative investment style, but also for our value-based, contrarian approach. Our view is that one should trim risk when the skies are clear, and buy risk when the storm has begun and markets panic. And, we believe that we have now reached the moment to reduce the underweight exposure to high yield markets and to implement a long position in investment grade. This is the big sell-off that we have been waiting for – for years. We recommend that clients with a strategic horizon adopt a contrarian stance, as well, and that they add risk.”
Verberk acknowledges that this approach may seem counterintuitive. “The near-term looks set to confirm a deep recession and severe market pain in some quarters. We appreciate that it does feel like the worst time to add risk, but that is usually the best time to do so.”
“It is the end of one cycle as we know it. But that sows the seeds for a new one.”
The contents of this document have not been reviewed by the Securities and Futures Commission ("SFC") in Hong Kong. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice. This document has been distributed by Robeco Hong Kong Limited (‘Robeco’). Robeco is regulated by the SFC in Hong Kong.
This document has been prepared on a confidential basis solely for the recipient and is for information purposes only. Any reproduction or distribution of this documentation, in whole or in part, or the disclosure of its contents, without the prior written consent of Robeco, is prohibited. By accepting this documentation, the recipient agrees to the foregoing
This document is intended to provide the reader with information on Robeco’s specific capabilities, but does not constitute a recommendation to buy or sell certain securities or investment products. Investment decisions should only be based on the relevant prospectus and on thorough financial, fiscal and legal advice. Please refer to the relevant offering documents for details including the risk factors before making any investment decisions.
The contents of this document are based upon sources of information believed to be reliable. This document is not intended for distribution to or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation.
Investment Involves risks. Historical returns are provided for illustrative purposes only and do not necessarily reflect Robeco’s expectations for the future. The value of your investments may fluctuate. Past performance is no indication of current or future performance.
Please read this information carefully.
This website is prepared and issued by Robeco Hong Kong Limited ("Robeco"), which is a corporation licensed by the Securities and Futures Commission in Hong Kong to engage in Type 1 (dealing in securities); Type 4 (advising in securities) and Type 9 (asset management) regulated activities. The Company does not hold client assets and is subject to the licensing condition that it shall seek the SFC’s prior approval before extending services at retail level. This website has not been reviewed by the Securities and Futures Commission or any regulatory authority in Hong Kong.
2. Important risk disclosures
2. Important risk disclosures Robeco Capital Growth Funds (“the Funds”) are distinguished by their respective specific investment policies or any other specific features. Please read carefully for the risks of the Funds:
3. Local legal and sales restrictions
The information contained in the Website is being provided for information purposes.
Neither information nor any opinion expressed on the Website constitutes a solicitation, an offer or a recommendation to buy, sell or dispose of any investment, to engage in any other transaction or to provide any investment advice or service. The information contained in the Website does not constitute investment advice or a recommendation and was prepared without regard to the specific objectives, financial situation or needs of any particular person who may receive it. An investment in a Robeco product should only be made after reading the related legal documents such as management regulations, prospectuses, most recent annual and semi-annual reports, which can be all be obtained free of charge at www.robeco.com/hk/en and at the Robeco Hong Kong office.
4. Use of the Website
The information is based on certain assumptions, information and conditions applicable at a certain time and may be subject to change at any time without notice. Robeco aims to provide accurate, complete and up-to-date information, obtained from sources of information believed to be reliable. Persons accessing the Website are responsible for their choice and use of the information.
5. Investment performance
No assurance can be given that the investment objective of any investment products will be achieved. No representation or promise as to the performance of any investment products or the return on an investment is made. The value of your investments may fluctuate. The value of the assets of Robeco investment products may also fluctuate as a result of the investment policy and/or the developments on the financial markets. Results obtained in the past are no guarantee for the future. Past performance, projection, or forecast included in this Website should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Fund performance figures are based on the month-end trading prices and are calculated on a total return basis with dividends reinvested. Return figures versus the benchmark show the investment management result before management and/or performance fees; the fund returns are with dividends reinvested and based on net asset values with prices and exchange rates of the valuation moment of the benchmark.
Investments involve risks. Past performance is not a guide to future performance. Potential investors should read the terms and conditions contained in the relevant offering documents and in particular the investment policies and the risk factors before any investment decision is made. Investors should ensure they fully understand the risks associated with the fund and should also consider their own investment objective and risk tolerance level. Investors are reminded that the value and income (if any) from shares of the fund may be volatile and could change substantially within a short period of time, and investors may not get back the amount they have invested in the fund. If in doubt, please seek independent financial and professional advice.
6. Third party websites
This website includes material from third parties or links to websites maintained by third parties some of which is supplied by companies that are not affiliated to Robeco. Following links to any other off-site pages or websites of third parties shall be at the own risk of the person following such link. Robeco has not reviewed any of the websites linked to or referred to by the Website and does not endorse or accept any responsibility for their content nor the products, services or other items offered through them. Robeco shall have no liability for any losses or damages arising from the use of or reliance on the information contained on websites of third parties, including, without limitation, any loss of profit or any other direct or indirect damage. Third party off-site pages or websites are provided for informational purposes only.
7. Limitation of liability
Robeco as well as (possible) other suppliers of information to the Website accept no responsibility for the contents of the Website or the information or recommendations contained herein, which moreover may be changed without notice.
Robeco assumes no responsibility for ensuring, and makes no warranty, that the functioning of the Website will be uninterrupted or error-free. Robeco assumes no responsibility for the consequences of e-mail messages regarding a Robeco (transaction) service, which either cannot be received or sent, are damaged, received or sent incorrectly, or not received or sent on time.
Neither will Robeco be liable for any loss or damage that may result from access to and use of the Website.
8. Intellectual property
All copyrights, patents, intellectual and other property, and licenses regarding the information on the Website are held and obtained by Robeco. These rights will not be passed to persons accessing this information.
10. Applicable law
The Website shall be governed by and construed in accordance with the laws of Hong Kong. All disputes arising out of or in connection with the Website shall be submitted to the exclusive jurisdiction of the courts of Hong Kong.