Francesco Curto, Hartwig Kos, Dirk Schlueter, Toby Dudley-Smith
During this talk, we will discuss our latest research assessing the impact of the COVID-19 pandemic on long-term expected returns across asset classes.
Back in April, we defined three scenarios based on assumptions of differing severity of the economic crisis caused by the pandemic: status-quo, 2009-repeat, and three-sigma. These are based on a bottom-up approach (rather than top-down), first analysing how fundamentals may have been impacted by the crisis, and how that flows through to expected returns. Over the past quarter, it has become clear that while the COVID-19 crisis is a three-sigma type event from an economic perspective, the impact on fundamentals for listed equities and corporate credit is likely to be comparable to those witnessed in 2009 (due to a combination of prompt actions from governments and central banks, better capitalisation in certain sectors, and a higher level of ‘sponginess’ by listed companies). Therefore the assumptions in 2009-repeat scenario are our base case.
At an aggregate level, this leaves the long-term expected rate of return on a diversified portfolio of assets relatively low, but some attractive opportunities exist within equities and amongst alternative asset classes. This outlook is consistent with a ‘square root’ shaped economic recovery. However, a ‘W’ or ‘U’ shaped economic recovery would put further pressure on expected returns, especially in equities, liquid alternatives and credit.