Olly Russ

Taking stock of the coronavirus fallout so far

Olly Russ

The outbreak of coronavirus has had an unprecedented impact across the whole of society, and of course financial markets. In the West, much of the worst in terms of number of infections is yet to come. However, we believe that provided the Western experience proves not materially worse than China – then when the virus exhausts itself, the various state interventions should prove market friendly over the medium to-long term.


We have made limited changes to the portfolio – these markets are virtually impossible to trade as they are too fast-moving. Last week saw the most extreme market moves so far, in many ways, centred on government bond markets, with US Treasury 10 year yields soaring from near record lows. Despite the risk-off nature, even safe haven assets plummeted. The reasons are unclear, given the massive monetary impulse, but possibly include:


  1. Total fiscal loosening to the point of almost helicopter money being discussed which will drive a surge in issuance.
  2. Total asset repudiation – i.e. liquidate everything and move to cash – even gold fell.
  3. Rumours of risk-parity hedge funds blowing up in the unprecedented volatility.

Earthquake - Liontrust European Income

Source: Bloomberg, as at 19 March 2020.


From an equity point of view, Bloomberg might as well have been connected to a random number generator as individual stocks soared and slumped for no apparent reason: Last week, shares in portfolio holding Roche fell despite being name checked by President Trump as doing good work on the testing side, now producing 8.5 million tests per month, and also having a potential COVID treatment – Actemra - ready to go. At the same time, Amundi saw a sharp rise on what really did not seem to be the day to be buying Franco/Italian asset managers.


Valuations are tricky currently. Economists are modelling apocalyptic drops in GDP for Q1/Q2, followed by the biggest bounce ever in Q3/Q4. Where this leaves earnings numbers is anyone’s guess quite frankly, until we get a handle on the duration of the lock-down. If it is a couple of weeks and the emergency measures are rolled back quickly, it might not be too bad – longer than that and permanent damage starts to be inflicted from which it will be harder to recover.


The below charts from UBS show where valuations stood as of 16th March.

MSCI Europe Valuations

The earnings number in these charts is of course highly speculative currently. However, the optimistic scenario is really China, where things are reverting fairly quickly, albeit we are reliant on there not being a second wave of infections requiring another lock down event.

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Key Risks

Past performance is not a guide to future performance. Do remember that the value of an investment and the income generated from them can fall as well as rise and is not guaranteed, therefore, you may not get back the amount originally invested and potentially risk total loss of capital. Investment in Funds managed by the European Income team involves foreign currencies and may be subject to fluctuations in value due to movements in exchange rates. The Fund’s expenses are charged to capital. This has the effect of increasing dividends while constraining capital appreciation. Investment in the Liontrust European Enhanced Income Fund writes out of the money call options to generate additional income. These call options will be “covered”. Unitholders should note that potential capital growth of the Fund would be capped if these call options are exercised against the Fund and the Fund’s capital returns could therefore be lower than the market in periods of rapidly rising share prices.


The information and opinions provided should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Always research your own investments and (if you are not a professional or a financial adviser) consult suitability with a regulated financial adviser before investing.

Wednesday, March 25, 2020, 11:46 AM