Hang in there!!

Last couple of weeks have been quite challenging, to say the least, for global financial markets. We have witnessed numerous multi-year records being broken, unfortunately on the downside though. All asset classes, especially risk assets (EQ, HY, EMD) have been hit indiscriminately and nothing except US long term treasuries has been a perfect hedge. Volatility has reached unprecedented levels; this turmoil can be attributed primarily to COVID-19 spread leading to a massive economic shock (oil price war added fuel to the fire).

My take: The situation is quite unfavorable, probably with a potential short-lived recession on the cards. However, this remains an exogenous shock so far, not a structural change and this too shall pass with time (weeks, months, who knows?). This has struck markets at a time when asset valuations were quite frothy; that coupled with initial underappreciation of the risk has led to such extreme pessimism. The biggest fear is of the unknown impact, both in terms of duration & scale. A raft of measures by the Fed/other CBs and governments have not been able to calm the markets until now. In fact, there is a massive liquidity squeeze, especially in credit markets which is evident when trying to offload assets.

I must admit that this is one of the toughest times to form a clear & concise view as events could continue to unfold in a dramatic fashion, thereby leading to wild moves. While it is impossible to try and predict the bottom, I do believe it is a good opportunity to invest (of course in tranches).

Bottomline: Should one buy risk assets? Yes, if you have a 12, 24 months or an even longer horizon. Having said that, it is crucial to stick to quality, stay well diversified between & within asset classes, get rid of leverage and maintain a decent exposure to liquidity and alternatives to offer flexibility in uncertain times.

My base case scenario is for markets to enter a consolidation phase (big ranges and high volatility) following an initial quick recovery from the final lows. As I write, SPX is trading at 2400.

Caveat: If you aren’t willing to witness massive volatility or MTM in your portfolios, then wait and watch might be the best strategy (with some rebalancing).

Now, for some punches ?? Times like these leads to Opportunities! Be vigilant, not scared!