The speed and scale of the market decline has been the defining feature of this market downturn, although this has been matched in unprecedented rapidity of response by both central banks and governments.
These moves have changed the investment landscape significantly and provide an excellent opportunity for active managers to significantly outperform as we navigate the coming months.
Given the changes in market dynamics, repositioning of key exposures will be critical.
Investors have been left with very few options to protect against future volatility. With global interest rates again at rock bottom, the traditional bond market will not offer much defence if the crisis lasts longer than is currently expected and we enter a more prolonged downturn.
Searching for alternatives that should provide a defensive and uncorrelated risk/return profile, we believe catastrophe bonds are extremely well placed.
The catastrophe bond market has not been affected by the recent volatility in financial markets. For example, the Twelve Capital Cat Bond fund is one of the few funds across all asset classes to have protected capital year-to-date, proving its worth as an effective and diversified asset class.
This comes at a time when catastrophe bond spreads are at their widest levels we have seen in over five years following the technical demand/supply imbalance they saw during 2019.
The sell-off has also created some interesting opportunities to re-position more risky equity exposures.
We believe this environment is perfect for relative-value oriented equity managers who focus on underlying business quality.
The US equity market has been blindly gyrating around factors, such as energy or the level of leverage on balance sheets, with little consideration for fundamentals.
We believe managers who are led by valuations and can take advantage of these dislocations should be well positioned to buy quality businesses on the cheap.
Jonathan Francis is head of investment research at Harrington Cooper
• Equity market valuations look reasonable to cheap in many areas
• Quality style managers with strict valuation disciplines should be well placed to capture opportunities in the US equity market
• Market volatility could continue
• Catastrophe bonds could provide uncorrelated, defensive exposure and income in a continued bear market