Has the time come to increase the asset allocation to commodities in the wake of the oil price shock? What are the key buy signals?
Actually, we are overweight commodities. At this stage, prices are really beaten down, particularly in the oil market. The open price war between OPEC and Russia, which broke out right during the escalation of the coronavirus pandemic, has caused a massive correction on oil markets. Markets were faced with a sharp drop in demand for oil as travel and transportation activity was cut back massively. At the same time, markets are awash in supply because the biggest producers are battling for market share. The agreement between OPEC and Russia to reduce output is a first step in the right direction. In parallel to that, the drop in real interest rates during the crisis is benefiting gold and other precious metals. We think that commodity and oil prices can increase from here.
Investors who are able to avoid negative interest rates are fond of preaching that “cash is king.” How would you respond to them?
Cash may be king during a liquidity crisis, but as a long-term investment strategy, it won’t help investors to achieve their financial objectives. Interest rates for cash are very close to zero or negative in most major currencies.
The correction on the stock markets unfolded in waves. Will a recovery proceed in waves as well?
Yes, I think so. The economic recovery is unlikely be a smooth one because the nature of this shock will lead to unrecognizably bad and often unreliable economic data, and because it has become nearly impossible to predict the path ahead. However, I am confident that the stimulus measures announced so far worldwide will prevent a depression-like economic outcome. After the substantial correction we have started to reenter the markets. We went overweight equities in late March and went overweight credit in April with measured buys/positions. The key lies very much in broad diversification, including geographic and time-horizon diversification.
Let’s end with the sixty-four-thousand-dollar question: will the recovery be V-shaped or U-shaped, or even W-shaped?
One may overemphasize the geometry of the recovery versus the shape of the shock. As long as the lockdown remains temporary and monetary and fiscal support during the lockdown is sufficient to prevent a wave of insolvencies among households and companies, economic activity can rebound quite quickly and significantly.
To give an example, if you need to close your restaurant during the lockdown, the economy will lose this business activity as long as the restaurant is closed. However, once the lockdown eases, you can reopen and hopefully resume activity, hopefully reaching pre-pandemic levels fairly quickly. Some consumption decisions that were postponed during the lockdown will be implemented later this year. This argument supports a V-shaped recovery.
The big uncertainty surrounding this view is time. The depth and duration of slow and low economic growth may leave behind structural damage. The longer the lockdown, the more stimulus the real economy will need to be resuscitated back to something resembling normalcy and eventually recover. However, policymakers seem to understand the urgency of the crisis, so at the moment there is optimism that we will see a rebound in global growth in Q3.