Markets have been trying to digest the impact of Covid-19 on economic activity and government policy. This is hard. The financial impact will be a function not only of the spread and lethality of the virus, but on the response of people and governments to the threat the virus poses to public health.
Markets are essentially trying to assess the outcome of two (still evolving) policies with opposing economic impacts – public health measures on the one hand, and monetary and fiscal stimulus on the other. The fiscal response has been variable in both size and focus; the monetary response, meanwhile, has been huge.
Resulting portfolio activity in our multi-asset funds has been based on an overarching understanding that the impact of Covid-19 on economic activity is severe, but temporary – but the depth and duration are unknown. Valuations are cheap, but not so cheap as to drive a meaningful increase in our risk appetite at this juncture. Rather, we have maintained or raised cash and are gradually nibbling into our favoured asset classes and taking profit in areas such as long duration that have done well.
In the TLux Global Multi Asset Income Fund, this has meant running cash at historically high levels – 9.8% today2 – while keeping equity exposure in Japanese and US equities via futures. Although a cyclical market, Japanese firms are trading at ultra-cheap price-to-book (near an historical low of 1), which should lock in asymmetric upside gains. US equites, meanwhile, are now pricing in a deep and extended recession that we do not currently anticipate, while also providing our clients with more exposure to quality global businesses with strong balance sheets.