How Virus Impact Has Altered Investment Calls Around the World

(Bloomberg) -- The rapid spread of the coronavirus is prompting strategists to tweak their calls across major asset classes as investors continue to assess its impact on the global economy.

From taking profit in bonds to being wary of too much equity risk, firms including Citigroup Inc. and JPMorgan Chase & Co. are among those that have moved to adjust their views even as risk appetite remains resilient despite the increasing death toll and number of infected people.

While China-watchers have been quick to assess the near-term hit to growth and the increased funding challenges for swathes of its corporate sector, mapping out the implications for assets in other countries has arguably been tougher.

Here are how some investors have shifted their forecasts this week:

Crest in Bonds

The risk-on vibe that’s playing out in markets this week prompted Citigroup strategists to take profits on a long U.S. Treasuries trading recommendation they made last month.

“Given price action dynamics in both rates and equities over the past two trading sessions, we are booking some profits, and wait to see if the number of cases internationally grows significantly,” the team including Jeremy Hale wrote Tuesday.

Similarly, Aberdeen Standard Investments ended long-duration plays on Australian and Canadian bonds as well as Treasuries, saying the rally had gone too far. Unless the coronavirus behaves differently to previous pandemics, it will be short-lived, Garreth Innes, who helps oversee the equivalent of $3 billion as head of Australian fixed income, said Wednesday.

“We still have a long-duration bias, but not at these levels. We want to see more of a sell-off -- and bonds have moved a lot further than currencies or risk assets.”

As the virus panic plays havoc with models, German money manager DWS Group reversed a call for higher yields on bunds. It says the Treasury rally has gone too far and now forecasts an uptick in U.S. Treasury yields after benchmarks touched the lowest levels since August.

“We have adjusted tactically to the somewhat more nervous market sentiment and have returned all our positive signals to neutral. This includes corporate bonds in the United States and in Europe, as well as emerging-market and Asia credit. It may be some time before investors’ appetite to seek higher returns replaces the caution triggered by the coronavirus.”

Currency Rethink

Nomura Holdings Inc. has flipped some of its top currency calls for 2020 just a month into the year. It recommends long dollar positions against Thailand’s baht and the Chinese yuan. Back in December, shorting the greenback versus these low-yielding Asian currencies was among its key trades for this year. Nomura is also advising selling the Singapore dollar against a basket of its trading partners.

“We may go into high-yielders like India and Indonesia once the global external backdrop begins to stabilize a bit,” said Craig Chan, Nomura’s global head of FX strategy in Singapore, on Monday.

Beware Complacency

Investors should rein in risk, JPMorgan says. The bank’s strategists trimmed their overweight call on equities to 5% relative to a benchmark allocation, from 7%.

“We are reluctant to chase short-term momentum,” strategists wrote Wednesday. “Instead, we tactically trim the risk of our portfolio further.”

Over at Citigroup, the strategy team is warning about a sense of euphoria and “substantive” complacency in financial markets, when the impact of the coronavirus is not yet clear.

“Pretty much every client we talk to wants to buy the dip, and that is not comforting,” wrote Tobias Levkovich, the bank’s chief U.S. equity strategist.

Buying Opportunity

Barclays Plc strategists led by Emmanuel Cau wrote Wednesday that “as our base case remains one of a mild global recovery and mid-single digit equity upside in 2020, we would use further weakness as a buying opportunity.” While there’s a range of potential outcomes with regard to the virus, financial conditions are “easy” thanks to central banks, and the positioning of long-only funds in stocks is “light,” they wrote.

Pictet Asset Management’s international multi-asset team reduced positions in equities, along with emerging-market debt and currencies, over the past two weeks. But Andy Wong, a senior investment manager at the firm in Hong Kong, says there are now attractive targets in technology, including cloud computing and e-commerce -- which will benefit from a bigger stay-at-home population.

“We expect disruptions to consumption patterns and a possible extended disruption to the global supply chain,” Wong said in an email Thursday.

--With assistance from Cormac Mullen, Joanna Ossinger, Subhadip Sircar and Cecile Gutscher.

To contact the reporter on this story: Andreea Papuc in Sydney at apapuc1@bloomberg.net

To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Cormac Mullen

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