Impact of Covid-19 on our funds
Impact of Covid-19 on our funds: from a credit standpoint and given current information – credit neutral. Our base case remains that economy weakness arising from the virus should be temporary and front-loaded. In the meantime, this will force central banks to remain highly accommodative, with a side-effect of a strong search for yield. as indicated by negative yielding debt at USD 14tr or an increase of 3tr YTD. Obviously, coronavirus is not neutral in terms of earnings growth as well as a potential disruptor of supply chain (bad news for certain sectors/corporates, HY, etc.), but once again, we expect this to be temporary. Furthermore, we expect sub-debt from financials to be somewhat immune given the combination of high steady income, strong fundamentals, supportive technical and last but not least appealing relative value.
View of recent sell-off/reason for the slight correction
While we expect impact of Covid-19 to be credit neutral for issuers held in the fund, price of the bonds held in the fund have not been completely immune by the sharp sell-off that took place in other markets this week (for example, EU equity that dropped double digit this week) and on average price of bonds held in the fund have decline on average between 2-2.5%. We feel that this price weakness should be short lived and would expect price to quickly recover. Furthermore, we are not changing our base case of +8 for the EUR fund and +9% for the USD/GBP fund – especially given the high level of income that the funds are capturing.
Update 10/03: New Article “Coronavirus: A credit Perspective” by Patrick Smouha on Gam.com