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Corona´s crisis survival guide
Market Outlook

Corona´s crisis survival guide

Yves Bonzon survival guide and recommendations and why markets could be temporarily closed until the health crisis is under control.
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16 MAR, 2020

By Yves Bonzon from Julius Bär

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Yves Bonzon, CIO at Julius Baer, shares a survival guide and recommendations for the markets. Bonzon thinks that markets could be temporarily closed until the health crisis is under control.

The current situation is so complex and evolving at such a speed that our recommendations must be divided into several sub-chapters:

The absolute level of the S&P500 Index neither tells us whether a recession is priced in or how deep it may be. Intra-sector valuation spreads clearly indicate a recession is already priced in. They are much more reliable like all relative, as opposed to absolute, valuation measures. The question at this stage is the duration and depth of the economy’s contraction, which is a function of how comprehensive and adequate the global policy response will be.
At the time of writing these lines, fiscal measures are too modest and vague. We, therefore, rely more on containment of the virus until fiscal measures are clear, sizable and actually deployed. Speed is key.
Countries that are able to print money in which they borrow should be favored
, i.e. USA, Switzerland, Singapore, China. Conversely, we are concerned about the EU institutions’ ability to coordinate and come up fast with an adequate response over and above Maastricht criteria and the stability pact. Accordingly, we reduced EU equities in favour of Swiss equities last week.
Quality and price momentum has continued to outperform. Our Investment Committee roadmap included an endogenous bear market at some stage, where leading bull market sectors and companies would lead on the way down. This logic is turned completely upside down given the exogenous nature of the shock. This has benefited our relative performance, which is, so far, a modest consolation factor. A value comeback requires decisive reflation. We are still far away from such a scenario, so we stick to quality for now, don’t average down or attempt to catch falling knives even though a technical counter-trend would most likely favour worst-hit names in the short-term.
Crypto assets have miserably failed their first real acid test, as crypto promoters wanted us to believe that in times of crisis they would be the modern equivalent of gold as a safe haven. Bitcoin lost more than twice as much as the S&P500 Index so far.
Gold hasn’t really worked, because systemic risk is still under control and interest rates cannot keep going further down. We stay open to considering gold (preferably in physical form) at some point as a valuable source of diversification but feel more comfortable accumulating some towards USD 1’500 as compared to recent highs close to USD 1’700 per ounce.
Do not rely on absolute valuation metrics. We are far too dependent on fiscal policy measures to make bets on valuation motivated grounds. The current crisis raises cash flow uncertainty to unseen levels in markets’ history. Navigating requires assessing macro drivers. Please be careful with bottom-up rationales, even though they might look right for the wrong reasons as markets might start a violent counter-trend rally anytime soon.
Investors tempted to capitulate should also appreciate that the gravity of the situation might lead governments to declare a global closure of financial markets for a few weeks. Under such a scenario, if by the time markets reopen the pandemic is under control, the prices at the reopening might gap up massively, preventing investors to cover their shorts. The current situation is so extreme that even such a scenario cannot be dismissed.

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