Wealth managers cling on as the other shoe drops; King dollar makes a U-turn
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Super spreader
The unlikely combination of a demand shock and a supply boost has had disastrous consequences for the oil price, and left allocators rethinking their priors once again.
The headlines this morning, not unreasonably, focus on the FTSE’s 7 per cent slump and the 20 per cent drops for the likes of BP and Shell. Questions of dividend sustainability will also be asked once again. But ballooning high-yield debt spreads are just as significant as share price moves at the moment.
We noted at the start of last week that junk bond prices held up reasonably well, relative to equities, in February. That shoe started to drop on Thursday and Friday, and has well and truly come off now. Europe's iTraxx Crossover index is hovering above the 500bps mark for the first time since 2013. A pretty bleak picture for investors, all told.
On a relative basis, DFMs’ fund picks stand a reasonable chance of withstanding these pressures. Energy has been a no-go sector in high-yield debt markets for some time now. And the continued shift towards ESG strategies has received another boost from today’s price action - even if the medium-term consequences of a much more competitive oil price are less clear.
But the ripple effects of these moves mean the above may not be much of a solace, particularly as clients prioritise outcomes rather than relative performance.
The continued rally in government bond prices will at least provide a concrete benefit to portfolios diversified in the traditional fashion. But these shifts mean banks could suffer just as much as energy companies - and that’s before the possibility of funding stresses is factored in. It all points to another miserable period for value managers - but they’re far from the only ones who will be worried this time around.
Dividing lines
One reason for - or outcome of - the latest surge in safe havens is an expectation that more monetary policy easing is on the way. With fiscal stimulus plans still notable by their absence, markets are now putting the odds that the Fed cuts to zero at its March meeting as high as 75 per cent. Big things are also increasingly expected of the ECB this week, particularly as the likes of Italian and even French bond yields are now rising, not falling, in light of the coronavirus’ spread across the continent.
Wealth managers will be aware that it's currencies, as much as fixed income, that are worth paying attention to here. As easing expectations are priced in, the US dollar has started to go into reverse. The dollar index has slumped again today, even as the oil price collapses. For once it’s the euro that’s been among the beneficiaries - perhaps as a result of its newfound carry-trade qualities.
The greenback’s fall means hedging costs have come down for UK-based allocators seeking to buy US Treasuries. But investors who haven’t hedged at all will have seen many of the gains of recent weeks wiped away.
The implications of a dollar drop are wider than that, of course. Emerging markets would usually be an obvious beneficiary of a weaker dollar, but those that are sensitive to commodity prices now have bigger issues to deal with.
Still, amid growing signs that a variety of Asian nations are either withstanding or emerging from the worst of the coronavirus spread - at a time when US and European peers remain in the thick of it - the dollar’s nascent fall is worth pondering a little further.
Blame game
With you-know-who again sounding out the possibility of a highly improbable comeback, it’s a good time to pause for a moment and examine Terry Smith’s comments on fund liquidity. The manager has pointed the finger at investment platforms, saying that issues with funds offering daily dealing ultimately lie at their door.
Mr Smith is right to say there’s nothing in Units rules that requires funds to offer daily trading. But the D2C platforms - only a couple of whom do insist that funds offer such dealing terms, rather than weekly or monthly trading - can effectively rebut his criticism. As they emphasise, it’s the demand from investors that has meant almost all retail funds offer daily access. That may change in future, but it’s hard to deny the current consensus has been driven by customers rather than platforms themselves.
