Interactive Investor

Coronavirus ii ACE 30 update: Liontrust SF Corporate Bond Fund

interactive investor's analysts bring you an urgent update on this ii ACE 30 rated ethical investment.

31st March 2020 17:25

Teodor Dilov from interactive investor

interactive investor's analysts bring you an urgent update on this ii ACE 30 rated ethical investment.

The coronavirus outbreak and subsequent pandemic have had a significant impact on the global economy and financial markets. Many share and fund prices have fallen sharply in a very short space of time, as has the cost of oil and other commodities. Volatility has reached levels not seen since the peak of the financial crisis in 2008, and many assets remain prone to sharp movements both up and down.

Given these unprecedented circumstances, with citizens in many of the world’s largest cities confined to their homes, we are collecting updates from managers of funds on the ii ACE 30 rated list of ethical investments. 

Here is the latest from the Liontrust Sustainable Investments Team on 30 March. 

Liontrust Sustainable Future (SF) Corporate Bond Fund

“The year has so far has been difficult both for bond markets in general and for our Sustainable Fixed Income funds at Liontrust. 

“Credit has been in unprecedented territory, both in terms of negative returns and record outflows from the asset class, with markets struggling to price in the impact of economies effectively shutting down in the face of coronavirus. To strike a more positive note, however, we are predicting a V-shaped economic recovery, with huge fiscal and monetary measures announced by governments and central banks around the world providing a floor from which markets and investment grade credit can consolidate and recover. 

“To provide some context, the aggregate of measures announced so far in the UK – including the large package to support the self-employed revealed on 26 March – equates to considerably more than 50% of the country’s GDP from last year.

“As we will come on to discuss, we also believe our favoured sectors in investment grade have strong bounce back potential as we move through the rest of 2020. 

“Looking at the recent market turmoil in more detail, the speed of the slowdown has been unprecedented, with many countries closing borders and shutting down their economies – and, as outlined, bond markets have struggled to price such events. 

“GDP growth is now expected to contract by around 15% in Q2 across the countries taking the most aggressive steps to combat the virus. This exceeds what we saw at the beginning of the global financial crisis (GFC) but we believe the underlying conditions are very different this time, and recent steps taken by central banks should mean this slowdown is shorter and recovery could be V-shaped within two or three months. While the decline is sharper and possibly deeper, the ultimate impact should therefore be less. 

“Focusing on the differences to the GFC, current events are not a result of weakness in the financial system and banks are part of the solution rather than the problem, with government support helping them to lend to companies. This means the moral hazard aspect that clouded policy measures last time around is simply not present. 

“Governments and central bankers have learned from the credit crisis, during which those that acted first – primarily the US – recovered fastest, and we have seen early and co-ordinated action to stabilise markets, often dusting off programmes first launched in 2008. Although there have already been a couple of false dawn, signs of stabilisation are clearer in recent days, particularly as the Fed and other central banks launch huge fiscal relief packages and large-scale QE, and we believe this could mark a bottom for markets. 

“Policymakers across the world are firmly in “whatever it takes territory” as they look to restore growth, providing effectively unlimited liquidity and focusing on propping up those most exposed to coronavirus, whether corporates, individuals or banks. 

“In the UK, amid a raft of measures so far, we have seen companies able to defer VAT payments to aid cashflows, individuals offered mortgage holidays and enhanced welfare payments, and banks basically given unlimited liquidity, more flexible collateral arrangements and reduced capital requirements. The table below shows the huge scale of monetary policy in the UK and this excludes the £110 billion and counting pledged for fiscal stimulus.

“Given all this unprecedented activity to digest, how do we see the rest of 2020 and beyond and how are we positioned? 

“We believe investment grade has suffered from a misconception that this is a financial crisis – and recent supportive measures are starting to address this. Liquidity does remain a major concern for corporate bond markets, however, with record levels of outflows and investment banks unwilling to take positions on their balance sheets. 

“For the week ending 18 March, figures from JP Morgan show outflows of €3.7 billion from the euro investment grade market (1.8% of the total AUM), £706m from sterling and $9.2 billion from the US, with higher figures for high yield. This was before central banks announced QE programmes, however, and we would expect a guaranteed buyer of unlimited capacity should help liquidity and cause investment grade outflows to slow. For now, high yield bonds are not part of QE policies.

“Investors were generally long risk coming into 2020 on the back of improving macroeconomic data and, as such, we believe recent weakness is largely a volatility issue for investment grade credit – selected sectors and issuers are exposed but we would expect the backdrop to improve in due course. High yield could be more exposed, with weaker financials undermining these companies’ ability to work through the sharp slowdown and default rates expected to spike.

“We have been tempted to increase beta but have resisted this so far: markets remain volatile and the path of recovery is uncertain as the virus continues to spread, and we have already seen some of our holdings rally off their lows. 

“We continue to have confidence in our favoured sectors as markets normalise. Banks are supported by governments and, while revenues may be lower, this is more of an equity story than bonds. 

“Insurers should recover as solvency levels are proven to be robust and the sector’s exposure to the virus is shown to be lower than feared. As for telecoms, with so many people working from home around the world, we could see the sector come out of the current situation with improved revenues. 

“As a counter to this, we continue to have no holdings in the sectors most exposed to current uncertainty, namely autos, oil and gas and airlines, and minimal positions in consumer goods and services. 

“We remain committed to our existing positions and believe that they are well positioned to recover as the market begins to benefit from the measures being taken by central banks, especially QE and relaxed capital requirements, and national governments, particularly fiscal stimulus and SME guarantee programs. We do not believe any of our holdings are exposed to a credit event.

“Consistent with our views that the recently announced QE programs will limit any increase in gilt yields over the coming months, the Bank of England have announced that their aim is to use QE to limit any rises in gilt yield (they would expand QE if necessary).

“Duration of the Fund was increased to neutral, with the absolute level being 7.5 years. We will look to reduce duration towards the bottom of the expected range and increase duration if it nears the top.

“Our base case remains that government bond yields will remain in check over the coming months and from a credit perspective, the recovery should be led by our favoured underperforming sectors. We believe investment grade is the place to be and our sector positioning is well placed to capture the recovery.”

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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