Market liquidity remains key

7 April 2020

Despite a couple of days of reprieve, liquidity still remains one of the key challenges for markets due to significant volatility, according to Janus Henderson’s head of Australian Fixed Interest Jay Sivapalan.

At the same time, the current crisis served as an economic “stop” to the markets, with unemployment in the near-term expected to stand at 10% to 15%, which would face a very deep, sharp depression-like growth outcome. However, this period of depression would last for months rather than years, he said.

According to Sivapalan, the stimulus measures put in place so far in Australia, whih were at 16% of gross domestic product (GDP) and  a global financial crisis (GFC)-style bailout, but rather than bailing out the banks, it focused on bailing out society and markets this time.

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“The liquidity in the Australian bond market has been extremely poor to the extent that along with other fund managers, we have collectively voiced our concerns about a systemic failure of the bond market. That said, we are starting to see some really good pockets of opportunity opening up – particularly some of the higher quality companies,” Sivapalan said.

Following this, globally, investment grade credit was down on average about 5%, the high yield market was down about 15-20% and loans were down by about the same amount while hybrids and equities were down by about 15% and 30-35%, respectively.

At the country level, those countries that would come out of the COVID-19 emergency quickest would be quickest to come back online, but they may not be able to open their borders immediately, he stressed.

“This means that the domestic economy will pick up before the external sector picks up. If you look at New Zealand for example, due to its vigilance, cafés, cinemas and gyms will likely open up relatively quickly, while their tourism sector may lag until the virus is under control globally, or whole populations can be vaccinated,” he said.

“These are the sorts of considerations taken into account when assessing investment opportunities, identifying geographies, sectors and businesses with a high likelihood of surviving the crisis and prospering once conditions normalise.”

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