The rapid spread of the COVID-19 virus, the subsequent aggressive containment measures, and the collapse in oil prices mean that global economic growth prospects have sharply deteriorated. Analyst earnings revisions will have to come down significantly as many companies are withdrawing financial guidance, postponing or cancelling dividends, and putting share buy-backs on hold. Global equity markets collapsed but have subsequently bounced back from their lows due to an unprecedented amount of monetary and fiscal stimulus packages across the globe. Primary bond markets froze for almost two weeks, but we are seeing some new issuance now. After an initial sharp decline, safe-haven bond yields are currently rising.

Given the phase the world economy was in (late cycle), the slowing earnings growth and hence growing number of downward earnings revisions, and the excessive valuations on the stock markets, a correction was already in the making. COVID-19 and the oil price ‘war’ between OPEC & Russia acted merely as triggers. For the time being, it will remain highly uncertain how deep the shock will be or how long the disruptions might last. Volatility is therefore likely to remain high in the near-term and that it is difficult to ascertain how far we are from the bottom of the market.

Outlook

All measures taken to contain the COVID-19 pandemic already have an impact on consumer spending and producer value chains and hence the availability/circulation of money in the system. We expect an ongoing downgrade of global growth. Besides the initial focus on the growth impact of Covid-19, investors will increasingly focus on balance sheet quality of companies, or in other words, companies’ resilience.

Bond markets have responded well to the actions of the ECB, but most market participants are in still risk-off mode, and there is an unwillingness to trade on secondary markets. At the same time, we see a gradual return of new issuance by companies and other institutions as they need cash to maintain their operations. Meanwhile, the full impact of the sudden standstill of the economy is not yet fully absorbed by the capital markets. But we do expect that the current low interest rates will stay for longer and might even go lower as inflation expectations are very low.

Read our economic outlook ‘Global recession inevitable, but where will it end?’ for more details.

Investment policy

Although the overall outcome is still uncertain, we think a global recession is looming. We feel that some of the upcoming negative effects have not yet been fully priced in by financial markets. Moreover, there is a possibility that the feedback loops in the system result in problems in the financial sector (e.g. bankruptcies, asset price declines) feeding back to problems in the real economy. Therefore, we see no reason to change our current cautious asset allocation.

Uncertainty will prevail on the financial markets in the coming weeks. We are, of course, closely monitoring all developments. If market corrections present opportunities, we will act accordingly. Relative to history, equity valuations still aren’t cheap, however, so for now we maintain our defensive equity allocation, as it is the best way to guard against further market corrections. Incoming economic data over the next few weeks will probably paint a very poor picture. Moreover, a lot of monetary easing has recently been priced in, and the question is whether central banks can (and should) deliver more. For our fixed income allocation, we remain broadly neutral, with a preference for credits with high-quality names. Overall, we keep investing in companies with solid impact and sustainability fundamentals, sound balance sheets, strong management teams and decent cash flow visibility.

Triodos Global Equities Impact Fund and Triodos Pioneer Impact Fund

With an underweight in equity and an overweight in cash, the equity portfolios were already defensively positioned. This explains why they are outperforming the index (no oil & gas exposure, no financials, relatively high cash positions). As long as there is little visibility with regards to growth and earnings development, the portfolios will remain tilted to quality companies with financially strong balance sheets.

Triodos Euro Bond Impact Fund

The fund is defensively positioned, which explains its outperformance of the benchmark. The high volatility of bond prices and the continuous flow of worrying news are not an environment to make large allocation shifts in the portfolio. The fund therefore maintains a neutral duration and keeps its positions in high quality (semi-) sovereigns and corporates. The cash position remains relatively high to guarantee high liquidity and to able to participate in new issuance opportunities.

Triodos Impact Mixed Funds

The funds remain underweight in equities and underweight to neutral in bonds. The overweight cash position is kept for liquidity reasons and to be able to participate in new issuance opportunities or selectively add to the equity position.