The ongoing market turbulence driven by the spread of coronavirus could lead to a recession, says Alejandro Arevalo, Fund Manager of Jupiter Asset Management’s Fixed Income team.
“Over the recent weeks, we have started to see that this could affect global growth, which was already starting to deteriorate last year. Chinese factories were slow to reopen even after the extended Lunar New Year holiday came to an end. The pick-up in coronavirus cases in Europe is also putting pressure not only on supply chains but on demand, increasing the probability of a significant global slowdown,” says Arevalo, who specializes in Emerging Market Debt.
Arevalo notes in an interview with AMWatch that it is currently very difficult to quantify how the pandemic could eventually affect markets and especially emerging markets.
“The coronavirus situation is developing all the time. What was true 48 hours ago may be very different just two days later and it is up to us to protect the portfolio from this uncertainty,” he adds.
At the end of 2019, Jupiter Asset Management managed assets worth approximately EUR 48.77 billion (GBP 42.8 billion). Some 88 percent of this was invested in mutual funds.
Cutting exposure to Chinese real estate and other measures
Arevalo manages the company’s Global Emerging Markets Corporate Bond fund and the Jupiter Global Emerging Markets Short Duration Bond fund. In order to protect the two portfolios, Arevalo says that Jupiter has cut down its exposure to Chinese property companies among other protective measures.
“We have also shorted through non-deliverable forward (NDF) currencies such as in Thailand and the Philippines that rely heavily on Chinese tourism. They have already started to underperform,” Arevalo says.
An NDF is a cash-settled, and usually short-term, forward contract. “We also bought some US Treasuries, which are a safe haven when you have these kinds of problems,” Arevalo adds.
Jupiter has also recently bought protection on a Credit Default Swap High Yield Index (CDX). “Even though this is not related to emerging markets we noticed that the spread differentials between US high yield and Emerging Markets was at levels we have not seen in the last four years. So, people were getting overexcited about the US high yield and we started to see a correction,” Arevalo notes.
Complacency until the reality hit in
Some investors in Europe were clearly complacent about the risk that the spread of the disease posed, and continued to trade on this market with a buy-on-dip mentality which had worked well on previous occasions, Arevalo says.
“The expectation was that coronavirus would be a problem in Asia, and that developed markets would be able to continue with their own growth stories without being affected very much. There was complacency in the market until we started seeing cases of the virus not only in developed but emerging markets,” Arevalo adds.
This post originally appeared on AM Watch.
