The coronavirus pandemic brought the 10-year global economic expansion to an abrupt halt, with the Dow Jones suffering its largest six week drop since the 1929 crash. Stocks recovered around half of their losses when policy-makers stepped in with massive easing. The outlook from here depends on the uncertain path back to normality and active management will be critical. We cut equity exposure to a small overweight and have a strong preference for high yield bonds over commodities and property, asset classes lacking policy support.

Investment Clock jumps to reflation

At the start of the year inflation was low, policy was loose and a new global upswing was under way. Social distancing measures to slow the spread of the coronavirus outside of China plunged the world into a sudden and very deep recession. The Investment Clock moved decisively into reflation, the phase of the business cycle characterised by economic weakness and deflationary pressure. We cut overweight positions in equities as the seriousness of the economic shock became apparent.

Shock, panic, policy response

The crash in stocks reflected a collapse in earnings expectations. Our sentiment indicator hit a record panic reading, setting the scene for a sharp rebound. Stocks and high yield bonds recovered about half of their losses as policy-makers responded in scale to support consumers, businesses and credit markets.

Navigating the recovery

The outlook from here depends on the uncertain path back to normality and we are taking a flexible approach. We currently have a small overweight in equities and a strong preference for high yield bonds, which benefit from effective policy-maker support, over commodities and property, which don’t. We are overweight US equities versus the UK and technology versus financials at the sector level.

Downside risk mitigation in multi asset funds

Our multi asset funds dropped in value more or less in line with their peer groups with lower risk funds suffering smaller losses, as expected. Diversification was beneficial in March with property holding up and government bonds rising. The Multi Asset Strategies Fund also suffered a drop but volatility capping came into force to limit further downside. The bounce back in stocks has been almost as intense as the decline and equity exposure remains low in this fund.

Trevor Greetham is Head of Multi Asset at Royal London Investment Management.