Coronavirus and your investments Part 2

Coronavirus and your investments Part 2

The Sterling Report

Marian Ross

Sunday, March 29, 2020

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Is this the bottom of the market? Prices fell precipitously in early March with the onset of the virus. By the middle of last week they had made a brief turnaround.

Everyone wants to know – where is the bottom?

Firstly, here is a recap of where markets are since the start of 2020:

S&P 500 (18.59)%

Jamaica Stock Exchange (30.85)%

Euro Stoxx 50 (28.21)%

Investment-grade corporate bonds (5.96)%

High-yield corporate bonds (15.32)%

Gold (6.77)%

Oil (WTI) (63.4)%

The price declines reflect not only investor panic, but also liquidity shortages and market mechanics.

For example, many large institutional investors are sometimes forced to sell their assets as they need cash to meet client withdrawals or margin calls.

Post the financial crisis, large banks play a much smaller role in “market making”/creating liquidity in markets. Regulatory changes effectively reduced the appetite of banks for risk assets (such as high-yield bonds and stocks). Therefore, price swings are now larger and pricing can be more opaque. This applies to upward and downward movements.

It is not productive to try to call a bottom for the market as there are many technical factors — outside of the macroeconomic ones — that affect how the market moves. It is more productive to select securities that represent good value.

For bonds, this may be investment-grade notes that have been beaten up. For stocks, it may be companies with low leverage and lots of cash that are likely to weather the storm.

Which investments are popular right now?

Equity-linked structured notes have become popular among sophisticated investors. The rise in market volatility has made these notes extremely attractive.

How does this work?

Here is an example: Credit Suisse (or a large A-rated bank) may agree to pay you 30 per cent per annum if the stock prices of Bank of America, JP Morgan and Citibank do not fall by more than 50 per cent. This note is typically short in tenor (1.5 years or less) and can be called by the issuer at any time.

The stocks of those companies (at the time the note was issued) were down 38 t0 40 per cent year to date. A 50 per cent downside protection from that level was quite attractive. With the rebound at the end of last week the prices were down 28 to 41 per cent.

If the price of any of the reference stocks (such as Bank of America, JP Morgan or Citibank) falls by more than 50 per cent, the note does not pay interest. However, as long as the price recovers in a subsequent period (before maturity) you will receive any missed coupon payments.

What yields are available in the market right now?

There are BBB-rated hybrid notes issued by A-rated companies that are yielding between nine and 11 per cent (last week it was between nine and 16 per cent). It's possible these yields could go higher (meaning prices could go lower) but it is important to keep them on your watch list and remember that it's almost impossible to time the market.

A few plain vanilla, investment-grade rated bonds issued by financial institutions are yielding between four and 5.8 per cent. These bonds were 15 to 20 per cent more expensive a few months ago. There was also an onslaught of new bond issues from many investment-grade corporates such as NVIDIA, Goldman Sachs, CVS, Coca-Cola. Coupons ranged from 2.95 to 4.25 per cent, with maturities ranging from 2025 to 2050.

These are the options available along the risk spectrum.

Advice to investors: Develop a watch list and keep liquid. Focus on buying assets with good risk-adjusted returns —not necessarily the market bottom.

Marian Ross is vice-president of trading & investment at Sterling Asset Management. Sterling provides financial advice and instruments in US dollars and other hard currencies to the corporate, individual and institutional investor. Visit our website at www.sterling.com.jm Feedback: If you wish to have Sterling address your investment questions in upcoming articles, e-mail us at: info@sterlingasset.net.jm


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