All Asset All Access, March 2020

In this issue, Chris Brightman, chief investment officer of Research Affiliates, discusses how the coronavirus pandemic is likely to drive a sharp contraction in economic growth, with critical implications for asset classes around the world. As always, these insights are in the context of the PIMCO All Asset and All Asset All Authority funds.

Q: How does the global impact of the new coronavirus disease (COVID-19) affect Research Affiliates’ assessment of economic growth, asset class return expectations, and positioning within the All Asset strategies?

Brightman: Working from home on Tuesday, March 17, I’m rewriting this note. Information available today has dramatically changed from earlier drafts. Any statistics that I might share about the pandemic – numbers of infections, hospital admissions, contagion and death rates, etc. – will be out of date before publication. I’m not a public health expert and here is not the place for speculation about COVID-19. In this note, I share Research Affiliates’ assessment of the impact on economic output, investment returns, and the coming repositioning of the All Asset and All Asset All Authority funds.

Rapid global economic contraction

Let’s start with the economy. Much of global humanity is now engaged in a seemingly unprecedented process of intentionally and immediately reducing travel, personal interaction, and many forms of consumption in an urgent effort to “flatten the curve.” By slowing the surge of infections and pneumonia cases, we collectively aim to keep hospital admissions to manageable levels. Simultaneously, policymakers are acting to mitigate the economic impact.

What do leading indicators tell us? Leading indicators of the economy include capital market signals, which are available in real time, and real economy measures, which arrive over weeks and months. Capital market signals include stock prices, real bond yields, commodity prices, credit spreads, slope of the yield curve, and implied volatilities. While today’s observations will be out of date before this piece is published, most if not all will probably still be pointing to a deep economic contraction.

We must wait for leading indicators from the real economy to estimate the magnitude of this contraction. These indicators include unemployment claims and average hours worked, building permits and manufacturers’ new orders, and purchasing managers’ indices and consumer confidence surveys. Later this month and into April, we will begin to see new data releases and analysis of many if not all of these indicators, which will then reveal a picture of the magnitude of the present contraction.

At Research Affiliates, as Rob Arnott said, we believe that “this too shall pass.” In coming months, after the surge in hospital admissions has peaked, the economy should begin to recover. People will return to work and begin to travel. Consumption and production will resume. Unfortunately, by then many individuals will have lost their jobs as their employers’ loss of revenues precludes making payroll. Some companies will go bankrupt and their stock prices will go to zero.