7 August 2020
John Roe, Head of Multi-Asset Funds at Legal and General Investment Management, looks at his experience of working in London’s lockdown ghost town, the spirals of doom in March’s investment markets and how he thinks about investing under the current extreme uncertainty.
After four months of lockdown, it’s all starting to feel too normal. Sometimes, I see old photos of people hugging from before Covid-19 and my instinct is to be horrified by their lack of social distancing. That’s not normal, but then nothing is anymore, so here’s what I’ve seen since March and what we think it means for investment markets now.
My lockdown experience has been different from most investors’, as I’ve been in the office some days every week. I’m part of a skeleton crew of 10-15 colleagues who are in LGIM HQ as a precaution against unknown-unknown risks to IT systems. We were key workers, who’d never openly call ourselves that because we’d have felt like frauds in comparison to the heroes of the NHS, bin collection, etc.
The first month was the strangest, in part because my boss, Emiel, had caught Covid-19. It impacted on him heavily for a month and even now he has residual issues. That meant I was in daily, commuting into the central London ghost town in a mask similar to Bane’s in The Dark Knight Rises. As an investor I can assess risk, but struggle much more with uncertainty. Back then it was just very uncertain how dangerous commuting and non-isolation actually was, because the UK had done so little testing.
On the investment side, markets were in meltdown of course. I got a call from a journalist on 21st March asking my thoughts on the virus and it stunned me, because right then it didn’t really matter. Covid-19 had become a sideshow for assets, an afterthought. Panic had escalated to such a level that a chain reaction had started as price falls forced investor fire sales, which pushed prices further and forced more sales. We were all caught in a spiral of doom and only the policy makers could pull us out. I think if the Fed had taken another week to react, the whole system would’ve imploded - that Doomsday clock was at one minute to midnight. As I was quoted at the time by Bloomberg:
“Central banks have to act to control volatility, forced unwinds and knock-on impacts. Only once the volatility is calmed can the market worry about Italy and the virus numbers.”
Fortunately, the Fed stepped up, as did governments to control the virus spread. In both cases the impacts were uneven. In lockdown, some suffered intense hardship due to personal circumstances, while others like me had outdoor space, no children and a much easier time. In markets it was unequal too, as asset owners got bailed out by big bazookas, and those who hedged their bets lost out.
Since then, both in markets and in society there’s been gradual progress towards normal. In both cases, we’ve now done the easy yards. The big wins in asset markets have already been made. Just take US investment grade credit spreads as an example; they blew out to over 2.5%, but are now back to just 0.4% above year end’s levels. On the activity side we see that too: initially when countries open up they see a big rebound but then it gets harder and harder to take each step. Our US economic growth tracker has gone sideways for a month for example, as the US struggles with virus cases above 70,000 a day.
Nobody has all the answers on where we go from here, but there are some simple steps we can try to take to limit the virus impact on both our lives and portfolio returns. For example, as our own virus experts have highlighted since May, mandatory mask wearing has a low economic cost but reduces infections materially. On the investment side as a team we’ve two principles we’re trying to adhere to, Investment Distancing and Asymptomatic Trades.
With so much uncertainty, we need to be careful about believing in any one narrative. So instead we need to place a higher weight on the chance that data will surprise and the apparent path will change. With that in mind, we’re placing more weight on tracking other investors’ sentiment and positioning so that we can practice Investment Distancing, which involves trying to stay out of the most popular positions, because they can be particularly vulnerable if the future takes a new twist or turn. One example would be that we’re now negative on investment grade credit, as there’s a common narrative that central bank buying makes it a sure thing.
We’re also on the lookout for trades where the virus is less likely to be the main driver of success of failure. In those we can diversify our risks better and also be a bit less reliant on that single, hugely uncertain topic. These Asymptomatic Trades are hard to find, but worth the effort given their addition to portfolios can be particularly rewarding. A current example would be Brexit related UK positions, or US equity sectors that are particularly exposed to the upcoming Presidential election.
I’d be kidding myself if I gave a high conviction view of where markets are going from here. The huge uncertainty facing society feeds through into investments too so the best we can do is prepare for a range of outcomes, and take some sensible steps to avoid being at the centre of issues that arise. Hopefully Investment Distancing and Asymptomatic Trades will help us achieve that, though we’ll no doubt face plenty more challenges before we can go back to a normal world.