Performance, March 2020
Corona epicentre moved from China to Europe, the US is also taking off
- The Chinese Hubei province, which was the original epicentre of the virus outbreak, was on its way back into gear at the end of March. Asia generally seemed to have the first wave of the virus under control even though India imposed a lockdown. And the unwelcome baton was passed to Europe. Particularly Italy and Spain appear to be the new epicentres of the virus. Despite of experience from MERS, H1N1 and SARS (the predecessor of COVID-19), the world faces a health challenge which it has not seen since the Spanish flu. In addition to extensive suffering and deaths, unprecedented economic challenges are thrown in especially due to the drastic measures taken against the spreading of the virus.
Measures appear to be effective, but leave gigantic economic burden
- The attempts to stop the virus spread appear to be working - particularly in the countries where the measures were taken in due time. This is positive, but the effect comes at a very high economic price. And governments around the world as well as supranational organisations are painfully aware of this. Therefore the many health-related measures have been accompanied by gigantic rescue packages from governments, central banks and others. As an example, the world’s most powerful central bank, the Federal Reserve in the US, has pledged asset purchases with no limit set on neither amount nor time, while the US politicians have approved a historically large USD 2,000 billion rescue package. The gigantic rescue packages calmed the financial markets somewhat in late March, but investors still seemed convinced that no one with certainty can say how hard the economic crisis will hit and how a recovery will unfold.
Oil conflict overshadowed by coronavirus
- All the while the coronavirus was turning into a pandemic, two of the world’s largest oil nations - Saudi Arabia and Russia - were arm-wrestling over prices and supply. This resulted in a sudden plunge in the oil price and thereby also caught the US in the crossfire since several of the shale oil producers in the US are among the producers with the highest production costs. A combination of increased supply and an economic slowdown has in March resulted in a historical plunge in oil prices of more than 50% in March and more than 65% since the turn of the year. The conditions for the price war have changed dramatically since the war was opened.
Coronavirus and derived economic emergency braking weighed on equities
- It went from bad to worse for the global equity markets as the coronavirus was spreading and an increasing number of countries imposed different versions of lockdowns. When things were at their worst, the global equity markets had fallen by more than 23%, but gigantic rescue packages made investors hope that the packages will cushion the economies. The equity markets were therefore dominated by a rising trend in the last week of March. This meant that the decline was reduced to around 13% in the global equity markets for the full March. Especially oil and financials have taken a beating since the oil price has dropped like lead and because investors fear that banks may be hit by a surge in bad loans.
Massive bond market movements in March
- The development of the coronavirus into a pandemic created massive movements in the bond markets in March. During the month, 30-year mortgage bonds were down by up to 10 points, but towards the end of the month the markets recovered somewhat. A contributory factor to the large increase in yields is the expectation of massive bond issuance to finance the different rescue packages. Amid all the turmoil, the Danish central bank hiked its leading interest rate by 0.15 percentage point following pressure on the Danish krone. As a result of the rising interest-rate level, most Danish bonds yielded negative returns in March.
Coronavirus and oil price collapse have put massive pressure on emerging bond markets
- The uncertainty about the extent and the duration of COVID-19 and thereby also the economic consequences for the individual countries have created and continue to create widespread uncertainty. The steep price declines in oil and commodities created major challenges for the commodity-exporting countries and their budgets and trade balances came under massive pressure. Bonds in external debt fell about 14%, while the local markets fell approx. 11%. Not surprisingly, the oil exporters (Angola, Ecuador, Venezuela, Colombia, Gabon, Nigeria) and the already challenged economies (Sri Lanka, South Africa, Zambia and Argentina) delivered the lowest returns from -65% to -20%, while the more conservative markets posted returns from 0% to -5%. The conditions for the individual countries have been completely upended. The development in COVID-19 and the commodity price level will be decisive, while new credit facilities from the IMF may relieve some of the uncertainty over the coming months.
Credit markets in March
- March 2020 was an extreme month on the credit markets! The bid-offer spreads in high yield were typically at 4%-5% and only for USD 1-2 million transactions. Three of the four largest daily spread widenings in EUR IG over the past 20 years were seen in March 2020. At one time, ETFs on corporate bonds traded 5% below their net asset value and a few days later 5% above! The crashing oil prices quickly pushed the first shale gas and oil producers to bankruptcy. The cruise line operator Carnival Cruise Lines (early March rated A- and now BBB-) issued USD 4 bn in 3-year bonds secured by a first-priority claim on its vessels at a coupon of 12%! High yield spreads are now discounting a 5-year accumulated default rate of 40%. The default rate of the historically worst 5-year period has been 31%.