The impact of the COVID-19 pandemic on global economies led to continued market volatility throughout March. Developed market equity falls in March meant that at the end of the quarter they had lost c.20% since the beginning of the year, although this is a recovery of sorts after recovering from lows of -33% on 23rd March. Corporate bonds were also badly hit over the month. Whilst an increase in real yields as inflation expectations narrowed meant March saw a decrease in the value of PPF 7800 liabilities, falling gilt yields since the beginning of the year (with 10-year gilt yields down by 0.48% and 30-year yields down 0.50%), have pushed the value of liabilities around 10% higher since January. UK pension scheme funding levels as measured by the PPF 7800 Index fell 0.7% in March to end at 92.5%. This means that since the start of the year funding levels have fallen 5.5%. However, the variation around these figures will be significant, depending on the size of a scheme’s equity and credit allocations and amount of liability hedging. In short, it’s been a torrid start to the year for pension schemes and the volatility doesn’t look set to disappear anytime soon.
But there are reasons to be cautiously optimistic. We believe there are three catalysts which will drive a market recovery. Firstly, confidence that we have hit the peak number of cases and a flattening of the new case curve. Secondly, a significant policy response across both developed and emerging countries. Finally, stability in financial markets and improvements in liquidity. Whilst we do not yet have visibility on the scale of the virus and any peaking of cases, there has been progress on the latter points. As we called for last month, most major central banks have acted quickly and at scale. The majority have cut rates to record levels and promised huge fiscal packages (in the order of 10% of GDP). This in turn has improved our third indicator and we are seeing money and credit markets slowly defrosting as Central Banks across the world – including the Fed, ECB and BoE - shored up liquidity. This at least ensures that, for now, the challenges experienced in mid-March have not lingered, although we are still by no means at ‘normal’ levels.
Although equity and risk asset markets have recovered somewhat, we would not expect to see a full-scale recovery for some time. This will require more clarity around both the peak number of cases in the virus and the stimulus exit strategy. It could be three to six months before economies start to return to something resembling normal. Until then we expect uncertainty and volatility to remain, albeit at lower levels than at the peak of the drawdown in mid-March. Pension schemes need to be prepared, both in terms of managing risks and being ready to reinvest into equity and credit markets.
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