As valuations have collapsed in just four weeks to the lowest levels in the last 80 years, Robeco told its clients with a strategic horizon that it’s time to buy and adopt a contrarian stance.
According to the firm’s co-head of credit, Victor Verberk, although the short-term outlook would be economically challenging, with market participants scrambling for cash and withdrawals, the market would finally try to look forward and slowly price the right COVID-19 premium.
“It is still uncertain when the global economy will be restarted. COVID-19 is still spreading rapidly and we have not yet seen the peak. As long as the end of corona is not in sight, markets will probably remain extremely volatile,” Verberk said.
“That said, markets will try to look through all the misery and will slowly price the right COVID-19 premium.”
According to him, fundamentals were still clearly weak and investors would be faced with a deep recession and lots of uncertainty for some time.
“But it is evident that we are in the phase of fear, panic and loathing. Regarding policies to soften the blow, expect fiscal support of over USD $1 trillion in each major economic region.
Sander Bus, co-head of the Robeco credit team, said that many global imbalances, such as the rise in Chinese private sector debt from just USD $4.5 trillion before the global financial crisis to USD $30 trillion today, were building for years and, at the same time, social inequality rose to levels not seen since the 1920s. As a result of this, a build-up of imbalances emerged in this expansion.
This unusual combination of market excesses and real economic fragility left both economies and markets vulnerable to a negative shock.
“We believe that we have now reached the moment to reduce the underweight exposure to high yield markets and to implement a long position in investment grade. We appreciate that it does feel like the worst time to add risk, but that is usually the best time to do so,” Verberk said.
Robeco believed that this would be the big sell-off and although the near-term would confirm a deep recession and severe market pain in some quarters.
“We are known not only for our conservative investment style, but also for our value-based, contrarian approach. Our view is that one should trim risk when the skies are clear, and buy risk when the storm has begun and markets panic,” he added.
“We recommend that clients with a strategic horizon adopt a contrarian stance, as well, and that they add risk. It is the end of one cycle as we know it. But that sows the seeds for a new one.”
