Capital preservation needed for deepest post-war recession

22 April 2020

A decline in global activity of between 10% to 20% in the first half of 2020 is plausible and investment strategies should aim to preserve capital, look for strong balance sheets and good quality assets that have been oversold, according to Aviva.

Aviva head of investment strategy and chief economist, Michael Grady, said the firm had increased its preference to be overweight government bonds, which reflected its view that central banks would continue to act to maintain easy monetary conditions, and at the same time allow fiscal space to be created without higher yields.

“Our modest underweight equity allocation reflects our concern that economic weakness will translate into historically weak corporate earnings in 2020, which we do not think markets are fully discounting at this time,” he said.

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“We have moved to a more cautious stance in our currency allocation, with a preference to be long Japanese yen and short other Asian currencies. We have a neutral view across credit, where corporate bonds spreads have widened sharply, but where there is now significant support from central bank asset purchase programmes.”

The global asset manager said the result of COVID-19 would be the deepest global recession of the post-war period and the scale of the economic shock had yet to be fully felt. Although the risks remained heavily tilted to the downside in the short-term, Aviva said it expected activity to begin recovering in late 2020.

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