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Thierry Vallet in L'express
Thierry Vallet, General Manager

Mastering market volatility is a key determinant for investors.

Published on
April 27, 2020
Published in Category
Expert views
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“Emerging countries like Mauritius will take longer to return to normal….”

Thierry Vallet anticipates financial markets to remain volatile in the second quarter and believes that this sanitary crisis will end a long economic cycle. However, he is confident that this pandemic will stick to people’s minds for a long time to come.


What are your views on the global economic crisis linked to the COVID-19 pandemic, taking into account the latest forecasts of the International Monetary Fund (IMF) which predicts a 3% contraction in 2020?


The COVID-19 pandemic, which has hit the global economy hard since the start of the year, brings an end to a long economic cycle. Financial markets closed at record levels late last year, while several economies were already under pressure; mainly due to Brexit, the economic slowdown in Germany and the trade war between the United States and China.


Several experts were already talking about a potential global recession, without having predicted that it would come from a health crisis, and that 22 million people in the United States would be unemployed within just 4 weeks, which is unprecedented! All the jobs created since the 2008 financial crisis have been lost within a few weeks.  Some sectors are more affected than others, including the tourism and the aviation sectors, and also the consumer discretionary sector, and it will take time for them to recover from this crisis situation.


We are gearing up for the first quarter’s earnings but since the negative impact of the pandemic only started to take effect in March, financial markets are expected to remain volatile in the second quarter.


We need to understand that volatility is a measure of investors’ concern over macro and micro economic parameters. Most often when investors are sceptical about the future economic situation, volatility rises. With the rapid spread of COVID-19 worldwide at the beginning of the year, the VIX index (the benchmark for financial market volatility) attained record levels identical to those of 2008.


Even if this situation offers many opportunities, investing in financial products does carry a risk factor. That said, the objective of a private bank is to grow the capital of its customers, whilst considering the risk profile of each client.


During this period of continued volatility, it is wise to employ long-term strategies: a diversified investment portfolio, geared towards defensive sectors such as consumer staples, healthcare and public services in the short term.


It goes without saying that such market volatility will negatively influence the capital markets?

At the start of the year, financial markets had suddenly collapsed, much faster than during the crises of 2001 and 2008. We noted that the Dow Jones had lost almost 35% of its value within a 1-month period before bouncing back to being at only 15% of their all-time highs while yields on Government Bonds fell to their lowest levels.


This is symptomatic of the different stages of a crisis; an increase in volatility combined with a decline in markets, then followed by a curtailment in the decline rate and finally, being faced with the actual economic figures. However, this time, the rapid and collective actions of Central Banks and Governments have helped to manage the market dynamics in a better and much faster way compared to 2008, but we are yet to take cognisance of the economic figures which might well be below expectations.



What does all of this mean for the investor's portfolio?

The economic environment is very uncertain, we are facing a crisis due to the global spread of a virus, which is now translating into a severe recession. According to the IMF figures, released last week, the present situation is worse than the one of the Great Recession in the USA. Developed economies will be significantly affected and we cannot tell if the pandemic will soon disappear, consequently enabling us to get back to “normal life”.  The impact of same is the significant difference in the market valuations.


Whilst we are currently operating within an environment whereby rates are nearing zero globally, coupled with uncertainties around risk premiums prevailing on equity markets, the traditional investment ratio of 60% equities (performance) and 40% bond (capital protection) does not apply anymore. It is our job to adjust our management models by ensuring that our clients’ portfolio bear a higher proportion of less risky assets, with the primary aim to secure their capital before we can take advantage of any future rebounds.



According to you, what actions should investors be taking?


The actual impact of this crisis will be known through second quarter results. Regardless of how the anticipated recovery shall shape up (V, U, L or W), we have empirically seen that we always recovered from past major crises and that financial markets continue to prosper. Long-term investors may find certain market values attractive but they must expect ups and downs in those values.


Whilst some economies, such as the USA, China and other Asian countries, will be able to adapt more quickly and bounce back, others, like Great Britain and the Euro zone in particular, will first have to solve the problems that already existed before the crisis in order to take off again.


Finally, for emerging countries like Mauritius, which are significantly dependent on foreign economic conditions, the return to normal will take longer. Under these conditions, the industrial sector, travel, car manufacturing and leisure industries will be severely affected, while consumption of basic food products, health care, telecommunications and public services will be on the rise.


If we look more closely at the situation, the FAANGs (Facebook, Apple, Amazon, Netflix and Google) have outperformed because they are adapted to the current environment, and I would also add Microsoft to the list for having invested in the huge cloud market. Likewise, in China, companies like Tencent, Alibaba, Baidu and China Telecom will benefit from the next economic cycle. We don't have a crystal ball, but our vast experience helps us to better understand and estimate the risks during periods of economic downturn.



As a banking and wealth management professional, how do you manage the expectations and fears of your clients and investors?


No one is able to buy and sell at the exact best time. We are engaged in a process of analysis and selection in order to identify investment opportunities. Our in-house specialists establish scenarios and suggest a possible opportunity to our committee. The latter assesses the potential before presenting g it to our customers. We are here to support our customers in growing their wealth in the best possible way.


In addition, we are constantly in direct communication with our customers, through phone calls or by teleconference, despite the confinement. Our clients are receiving almost the same service standard to what they would have normally received from us had there been no confinement, and I would also add here that we are being even more engaged and active in managing our clients' investments during these periods of high volatility.



What will change after the pandemic for investors and how will they adapt to the new economic environment?


There will not be many changes in substance for investors but certainly, there will be some in the approach.  We were already engaged in a digital transition and the current context shows how the digitalisation of the economy offers a certain continuity in this period of confinement. If this pandemic had taken place in the 1990s, and that is only 30 years back, the economic situation would have been much more catastrophic. Today, we can continue shopping online as well as investing in financial securities. This digitalisation process will accelerate after the confinement is lifted, as everyone will want to minimise the impact of a future sanitary crisis.


After this crisis, we will probably note an increase in the portion of “safe haven” assets in portfolio allocations. This pandemic will remain in people's minds for a long time, because we are living through an era that has marked history and each one of us will want to make some adjustments to our way of living.


But eventually, similar to other periods of high volatility, well-informed investors who have managed to keep afloat will get through this crisis and will certainly be rewarded in the long-term.



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