23 April, 2020


What’s happened?


  • “Normal” Western world still quarters away
  • Markets more stable
  • Oil has extraordinary week, falling into negative territory


Focus on private debt


  • Attractive characteristics
  • Opportunities to invest to support the global economy


What’s next?


  • Markets in holding pattern, waiting to see if restart of economy is successful
  • Mercer: Neutral on equities, positive on high yield and investment grade bonds



What’s happening?


Deutsche Bank has polled its clients three times in the last few weeks asking when they think the Western world will mostly be back to normal.

  • In March, responders largely thought things would mostly be back to normal by this summer. Their most recent poll taken on 20 April showed less confidence in this with 35% not expecting some sort of normality by September
  • Mercer clients on the webinar, however, saw some sort of “normality” not returning until next year

Deutsche Bank also asked their clients whether they thought the coronavirus would lead to inflation or deflation on a 1 to 5 year view. 

Arguments for and against


  • Inflation

o   Global economy goes back to works without further major alarm (successful vaccines/treatments perhaps)

o   Lingering government and central banks support leads to global boom from 2021 Economy lifts off, pushing inflation higher


  • Deflation

o   Continued poor business confidence as companies and jobs are lost

o   Government cut spending to repay debt = decade of global austerity

o   Prolonged poor growth


Reality could be more nuanced:


  • 1-2 years: deflationary thanks to high unemployment and low wage growth
  • 2+ years: might be inflationary. Depends on strength of economic recovery, which is rather difficult to tell at this point

Poll responses: Both Deutsche Bank’s clients and those on the Mercer call saw inflation as slightly more likely than deflation


The oil price goes negative in the US!


While many strange things have been going on in the global economy and markets, nothing has been as strange as the oil price falling MINUS $40 a barrel[1]. Even after the event it is not 100% clear why this happened, but what appears likely is that with storage capacity running out, no-one wanted to physically receive any oil as they had nowhere to put it.  This pushed the futures price lower. It’s reported that at the same time there were others who were ‘long’ oil who found themselves in financial trouble as the price fell. This forced them to sell regardless of the price, pushing prices negative. At the time of writing the oil price is very low, but positive. Oil prices will remain under pressure until the global economy recovers and we start driving cars and flying airplanes.


Focus on private debt


Already an attractive asset class, in our view, we believe private debt can today provide investors with an opportunity to both make investment returns and help support the global economy during the Covid-19 outbreak.


We see the following attractive characteristics:


  • Strong cash yield over government bonds
  • Large pool of companies
  • Regular cashflow useful for liability matching
  • Diversifies portfolios from equity markets to reduce overall risk
  • Valued quarterly to smooth portfolio volatility


Why now?


  • We see higher spreads over government bonds
  • We see better overall yields
  • We see better placed than equities in company capital structure in event of collapse
  • Historically the asset class has had better recovery rates than public market bonds, based on our own sources and research like Preqin.


Opportunities knock:


  • Midmarket companies need help with liquidity needs now
  • Strong demand as banks have shrunk back from lending since last crisis
  • Constructive and flexible deals are made directly with companies
  • Mercer has advised on $120bn in private assets (as at April 2020).


For investors who can tolerate some illiquidity in their portfolio, we believe there are significant opportunities in private debt.


What's next?


Markets have stabilised somewhat since the initial Covid-19 outbreak, but are waiting to see when and how strong the economic pick up is before quitting their current holding pattern.


In the short to medium term, we expect some more significantly poor economic data. We remain neutral on equities but believe there is still value in high yield. 


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