Prolonged volatility in equity markets expected

Western governments are less likely to be able to contain COVID-19 compared to China which will lead to longer volatility in equity markets, according to Antipodes.

Although the initial containment efforts would clearly slow the economy, adding to volatility and increasing uncertainly around corporate earnings, the biggest question for investors would be how bonds would react to stimulus.

Antipodes’ chief investment officer, Jacob Mitchell, said that from a credit perspective there would be both a supply chain shock and a global demand shock and how the inconsistency between equity and bond markets was resolved would have broad implications for both equity sector and style outcomes.

“If bond yields rise, the potential carnage in long duration equity beneficiaries would be very painful,” he said.

“Previous episodes of QE have seen investors recalibrate their expectations around economic growth higher, followed by a subsequent re-rating in yields and the outperformance of low multiple – or so called ‘value’ – stocks.”

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According to Mitchell, defensive healthcare positions in the Antipodes portfolio with potential upside around coronavirus vaccines and therapies included Gilead, Merck and Sanofi. “Over the course of the outbreak Antipodes has selectively increased our defensiveness and continued to add targeted tail risk protection,” he said.

“However, we also continue to look for opportunities to invest in great businesses with a high margin of safety, preferably with structural growth prospects and positioned to withstand regional macroeconomic disruption.”