Stockmarkets are not pricing in an extension of a global lockdown beyond Q3 or a potential 'second wave' of a coronavirus outbreak, according to Rathbone Investment Management's David Coombs, who warned stockmarkets could plunge below their mid-March lows despite a recent bounceback.
Coombs, who runs Rathbones' range of multi-asset portfolios, said there are three key scenarios the world could find itself in - all of which are equally weighted in terms of probability, but two of which will have negative outcomes for the global economy.
"One scenario is the lockdowns have to continue for much longer and beyond Q3 this year, which is not factored into markets at the moment in my view," he explained.
"Scenario two is that we come out of lockdown globally, the virus comes back and we lock down again from Q4 onwards, which is also not factored into markets at present.
"And then the positive scenario is that we have a phased exit across the globe and the virus does not return in a material way.
"Could we see markets revisit the lows we saw mid-March? Yes, absolutely, if two of these three scenarios unfold. Could we fall even lower than mid-March lows? Again, yes.
"A market crash is not our prediction or our forecast, but it is a very, very real possibility."
As such, the head of multi-asset has put several forms of protection in place across his portfolios including put options, which he buys into whenever the VIX - or volatility index - dips below 30, various highly-liquid assets and gold.
"I am not a gold bug by any stretch, but gold does very well when interest rates are low and they cannot get much lower than negative, so it was an attractive asset to us before the pandemic.
"I also believe we will see a deflationary environment over the medium-to-long term and gold has typically been a good hedge against this," he said.
"This theory is being tested because a lot of economists think that all of this fiscal easing and monetary easing is going to be inflationary. They thought the same back in 2009, but I think this time it is different."
Coombs pointed out that, during the throes of the Global Financial Crisis, central banks engaged quantitative easing policies which led to the inflation of asset prices.
This time, however, he said the UK Government is paying the wages of some 60% of the population through its furlough scheme, so the money is now reaching the end consumer directly.
"The deflationary forces at play are significant, in my view," he said. "But there is going to be a battle of opinion and it will mean that inflationary fears in the market will pick up. For that reason, we have been buying index-linked bonds."
In addition, the manager has been building positions in "safe havens" such as Singaporean and Japanese government bonds - assets he has not held for almost 20 years.
"If you had told me three years ago that I would be buying Japanese bonds with negative yields, I would have said you were completely mad, but I find myself doing it because I want to hold yen," he reasoned.
"I also want to hold US dollars right now, because sterling looks very vulnerable. If we get a risk-off sentiment in markets, I need to be able to protect against that."