As economic data and yields portrayed the possibility of a broad economic recovery, few would have thought that one may have to once again intensify thinking on how to best protect their investment portfolios against a severe downturn.
This has been the case in recent weeks, when out of the blue, the coronavirus outbreak struck.
Citing concerns that the outbreak may continue to spread to other countries with weaker health systems, the World Health Organisation (WHO) recognised the deadly pneumonia-like virus as a global health emergency. Consequent to mounting fear of the virus spreading further, access into one of the world’s largest economies has been somewhat restricted, while factories and stores have been temporary shut, bringing the nation to a halt.
According to a statement issued by the China’s Ministry of Health, the death toll from the epidemic has risen to 565, with another 28,276 confirmed cases worldwide.
Fearing the economic damage from the fast-spreading coronavirus, investors trying to assess the potential economic fallout, shunned global equities and sought the relative safety of treasuries, sending yields, which move inversely to price, to the panicky lows reached a few months ago.
Ensuing to the latter shift and the consequent increased demand for safer assets, the benchmark 10-year US Treasury tumbled by nearly 40 basis points, and was close to slipping below the 1.50 per cent levels, for the first time since early September; a period characterised by the prolonged US-China trade war, which at that point in time showed no signs of abating.
On track to post its biggest monthly drop since August, the 10-year US Treasury fuelled recessionary fears among investors, as it dipped below the three-month Treasury rate, inverting a key part of the yield curve and signalling the possibility of an economic downturn.
To clarify thoughts, an inverted yield curve is a scenario at which long-term debt instruments have lower yields in contrast to short-term debt instruments.
As previously conferred, the recent downturn in sentiment caused by the pneumonia-like virus have left a significant impact on the markets at large.
Notably, upon expectations that macroeconomic conditions are set to deteriorate, credit spreads widened, as the demand for treasuries increased, this negatively impacting the high-yield market at large.
As one would expect, industries solely or partially reliant on China’s economy, and the country’s substantial demand for raw materials for the manufacturing industry, and manufactured goods, took a beating. For instance, given that Wuhan, the epicentre of the virus, is a significant transportation hub in the country, shipping conglomerates have since experienced significant headwinds.
This being reflected in a significant dip in freight rate for super tankers on key shipping routes from the United States and the Middle East to Asia.
Undoubtedly, until a solution, to eradicate the virus is found, the coronavirus outbreak will surely remain a very sensitive element, at least in the short term, not just to the shipping industry, but to the markets at large, influencing market movement.
As a result, in this rather gloomy scenario, we reiterate that a bottom-up approach is indeed imperative, to both gauge opportunities the current environment may pose in the near future, and to ensure that the selected investment is ultimately capable of servicing its debt.
Disclaimer: This article was issued by Christopher Cutajar, credit analyst at Calamatta Cuschieri. For more information visit https://cc.com.mt/. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.