Listening to all the frenzied discussions about what shape the economic recovery will take, my mind drifted back to a holiday I took to Kerala. The native language there is Malayalam, and one of its characters, Jha, struck me as the sort of recovery shape that I’m expecting: ഝ.
To translate from Malayalam into fixed income: broadly, I think we’ll be trying to use periods of panic and market falls to buy bonds with solid risk-return profiles. And when markets swing higher again, we’ll be looking to take profits when prices get ahead of themselves. This recovery isn’t going to translate nicely into the V or U that many are expecting, its letter will be something far more decorative.
This week was pretty ornamental itself. Risk was on following some good news about the Moderna vaccine, before coming off again as a few countries went back into lockdown. But, credit is still performing well and acting as a safe-haven for equity income seekers. Call it ornamental, or maybe a particular type of news-delivery sandwich.
Credit rallied as the vaccine produced antibodies to the coronavirus in all patients tested in an initial safety trial, clearing an important milestone. The findings seem to have increased hopes that a vaccine can be brought to market quickly.
Things took a turn for the worse as cases continued to rise in some countries and further restrictions were imposed. The worry, in particular, is the share of cases with no clear indication of the infection, with concerns about hidden chains of transmission. These are patients who cannot be linked to other confirmed infections or existing outbreaks. Such worries could lead to more paranoia and blunt and broad lockdowns.
So how healthy is the rally we’ve seen in credit? The pessimists think it’s fragile and will come apart in the next few months as default rates spike; the more optimistic think the rebound shows how quickly we will be able to shake off the pandemic given the extraordinary government responses coupled with the safety net of technology that allowed many industries to keep ticking over during a lockdown. I have a hunch that the reality will be somewhere in the middle.
Although severe damage will be done to developed economies, the toll on emerging countries could leave lasting scars. Millions could be tipped into extreme poverty due to a heavy reliance on global trade, tourism, commodity exports and external financing, and it’s unlikely their healthcare systems were equipped for a pandemic.
In Kerala, I had some first-hand experience of how rudimentary these systems are, and how illnesses there can really knock you back. I was in hospital for a day with severe dehydration after a nasty stomach bug - a bug that even the Hospital for Tropical Diseases in London wasn’t able to identify! I spent a comical and delirious 30 minutes translating for the German in bed next to me. I turned his German into English for the young doctor, who then translated into Malayalam for the senior doctor. Confusion reigned when I got ‘off’ and ‘out’ mixed up in reference to this poor man’s gall bladder. You’ll be relieved to know that my grasp of fixed income is significantly better than my grasp of German.
I hope you’re all looking forward along with me to a break over the summer. In the meantime, this will be my last blog until September. Stay safe and hope you enjoy your summer
