This issue of Investment Quarterly comes in a period of extreme dislocation, both from the spread of the coronavirus and its economic and market fallout. Health and safety are of the utmost importance, and we hope that you and your loved ones are well. Our admiration and thanks go out to the health care professionals and other frontline workers who are pressing on despite the dangers.
As communicated previously, we at Neuberger Berman have taken many steps to ensure that client portfolios are being managed effectively and that our operations remain fully functional. The vast majority of our people are now working from home. I am pleased to report that all of them—portfolio managers, traders, advisors and others—are able to do their jobs with their typical focus and energy.
Importantly, our systems have also performed well: Market data, trading platforms and portfolio information are available in real time, and we are keeping in constant contact via email, instant messaging, video conferencing and voice. Behind the scenes, our business continuity team has made sure that all these functions have more than enough capacity and safeguards to keep running smoothly as we conduct operations from numerous individual locations.
More than ever, communication with clients is essential. We have been experimenting with a range of methods to connect, including webinars and videos, many of which are housed on our website at Investing in Volatile Markets. This webpage is frequently refreshed with timely views from our CIOs, portfolio managers and analysts. In particular, I would highlight the insights of Terri Towers, senior health care analyst, and Michael Recce, chief data scientist, whose teams have been working together to track the spread of COVID-19 and assess mitigation and treatment strategies.
While projections vary, we believe the pandemic has a ways to go in the United States. Our base case is that a peak will likely occur in May or June, but that timetable could change materially. Actions by central banks and governments have been extensive, and should help the economy get through a unique period of inactivity. However, markets are likely to remain highly volatile until there is more clarity on the trajectory of the outbreak and path toward economic recovery.
In this issue of IQ, Joe Amato, our chief investment officer for equities, provides an overview of our thinking on current conditions, while other articles focus on planning strategies tied to volatility and recent legislation. We also highlight technological innovations, including “big data,” that have become increasingly visible and relevant in the midst of crisis.
As always, I hope that the publication proves useful, and urge that you reach out to your Neuberger Berman team with any questions about its contents or the market environment.
Highlights 2Q 2020
From the Asset Allocation Committee
Our base case is that reported COVID-19 infections will peak in the U.S. in May or June.
Given containment efforts, we expect a global recession that affects small business and consumers directly, although rapid extensive response by fiscal and monetary authorities can absorb the worst of the shock.
Equity and credit markets are likely to remain volatile and may take another leg down before rebounding after a peak of infections is confirmed.
We favor a two-step approach, focused on risk management and diversification until infections peak, followed by increasing allocations to higher-quality risk assets, including:
- Investment grade credit: Once liquidity issues ease, potential compression of elevated spreads and coupon payments could make risk-adjusted returns competitive with equities on a risk-adjusted basis (modest overweight view).
- Large-cap equities: Larger companies (modest overweight) are generally less leveraged and vulnerable to the epidemic than smaller names (neutral). Given uncertainty reflected in valuations, we think it won’t be necessary to chase cyclical sectors early in the market recovery.
We have downgraded our 12-month views on segments including:
- High yield fixed income: The asset class (neutral) is vulnerable to defaults, the oil price war and credit crunch.
- Emerging markets: Health care systems, supply chains, commodity weakness and U.S. dollar strength are potential headwinds for debt and equity (both neutral).
- Private equity: With public market declines, private equity (neutral) may be overly weighted in many portfolios. The use of available capital should help general partners support portfolio companies but may affect investor returns.
All views are over the next 12 months. See disclosures below, which include additional information regarding the Asset Allocation Committee and the views expressed.