RIO DE JANEIRO, BRAZIL – The markets are unprepared for the severity of the consequences of the global spread of the coronavirus, and the turbulence has only just begun, according to a manager whose portfolio outperforms its peers.
The alert was sounded by Mike Riddell, manager of Allianz Global Investors, who manages US$4.7 billion for the company.
“The market’s repricing speed was obviously drastic; however, the markets switched from not pricing any risk at all to a moderate risk,” Riddell said in a phone interview. “We think the markets can still move in volatility. ”
Riddell’s Strategic Bond Fund, which he manages along with Kacper Brzezniak, outperformed 98 percent of its peers last month when the markets had to cope with record low bond yields, losses in equity markets, increased volatility in the foreign exchange market and unexpected interest rate cuts by central banks, such as the Federal Reserve’s emergency cut.
Demand for US Treasury bonds remained high on Friday, and yields on 30 and 10-year bonds fell to a new record.
The London-based Allianz manager had been preparing for a market swing for a few months and believes the recent pricing is still very moderate. He uses options to focus on further currency fluctuations and has also moved toward a drop led by short-term US yields as he perceives a substantial chance for the Fed to reduce interest rates to nearly zero.
“If global data indeed worsen in the coming weeks and months, investors will realize that central banks cannot cure the coronavirus, and markets like currencies and corporate bonds may still undergo a correction,” Riddell said.
The implied one-year volatility of the euro-dollar, which rose in late February to its highest since mid-2019, retreated earlier in the week. However, on Friday the indicator rose to levels of some six percent above last year’s average. Riddell said positioning for greater currency fluctuations through options was remarkably cheap in January.
Although the manager has reduced some of these stakes, given the perception that the eurozone is already in recession, he expects currency volatility to be “twice as high” if the situation worsens. Although US and UK bond yields are near a record low, Riddell does not perceive this as a tier and holds a “large” position on US “slopes” through swaps and futures.
“Even if we don’t get hysterical about the impact of the virus on health, that doesn’t mean the market and the economic impact will be restricted,” he said.
“It’s the quarantine and ultimately the shutdown of large parts of the global economy that cause significant damage to the economic and financial market,” Riddell said. “My basic theory is that things are going to get a lot worse from now on.”
Allianz Global Investors (commonly called AllianzGI or AGI), is a global investment management firm with offices in over 20 locations worldwide. Employing nearly 3,000 it manages over EUR 500 billion in assets on behalf of institutional and retail clients. It is owned by Munich-based global financial services group, Allianz, which is the world’s largest insurance company.
Its asset management division, which consists of PIMCO, Allianz Global Investors and Allianz Real Estate, has almost two trillion Euro of assets under management (AuM), of which €1,448 billion are third-party assets