18 Mar 2020 3 min read

Navigating today’s market volatility

By Erik Lueth , Christopher Teschmacher

To keep our wealth manager and advisory intermediary clients up to date, we hosted a webinar on Thursday 12 March to answer your questions on these challenging times.


The global spread of the COVID-19 virus has disrupted global financial markets. In addition, the recent slump in oil prices has added to adding to the widespread volatility. We received many questions from our clients and below, we share some of the top queries and our answers.


Q: Is the coronavirus a catalyst for fundamental change in the business cycle?

Erik Lueth, Global Emerging Markets Economist: This is something we have been discussing: is this a short blip that will last one or two quarters, or is it something like the global financial crisis that could spark credit events, ending up with lower gross domestic product than before? We believe the likelihood of these two scenarios is 50/50, so this is still an open question.

Chris Teschmacher, Multi-Asset Fund Manager: Like Erik says, the biggest concern for us is how this may affect credit markets. Will we see a prolonged slowdown in economic activity like we’re seeing in Italy, which has slowed down cash flow to businesses, and which raises the question of whether they can repay their debts?

If those businesses collapse or fail to pay their debts, that’s when a credit event may happen and banks will start to tighten. One of the things we have been discussing as a team is stimulus in the form of forbearance – banks being lenient on debt repayments – or this may have a sharp impact on otherwise healthy businesses. But if this situation is prolonged, forbearance won’t help if there’s no cash coming in at all. It’s a question of how long this lasts as to the interaction with the credit markets.

Justin Onuekwusi, Head of Retail Multi-Asset Funds: This is a key question for how we assess any current opportunities in credit and high yield. The possibility of this situation turning into a credit event is really the only thing holding us back from significantly increasing our credit and high yield allocations, because from an overall valuation perspective they look attractive.


Q: Do you see the potential of a further rate cut by the Bank of England (BoE) at the next meeting? Are negative rates a possibility?

Erik: We do see room for more cuts. The new BoE chief said there is another 50 basis points to go, so we think they will use that policy space, however we doubt they will go to negative rates. In a situation with quarantines and lockdowns, it is unlikely the BoE will use that ammunition. It is more likely they will look for targeted action – something like lending schemes for small-to-medium sized businesses.

Justin: The BoE and the European Central Bank (ECB) have less policy space compared to the US. So the BoE’s next steps might be more unconventional, such as quantitative easing or buying bonds.


Q: Has the UK budget made you more or less positive about the prospects for the UK?

Erik: It’s a positive step as fiscal policy can help the most in this current environment. Also, the UK has strong co-ordination between fiscal and monetary policy.

Chris: I agree, it’s encouraging that the UK has the ability to do something like this quickly. In many other countries, for example in Europe, it requires far more people and institutions to agree on a coordinated policy approach and in this current environment it is very difficult.  

Justin: Exactly, like in the US, President Trump needs Congress’s approval for any significant fiscal stimulus. There seems to be a split between Democrats wanting increased spending and Republicans being biased towards tax cuts, so that’s a very challenging situation.   


Q: Which is a stronger signal to markets – bad economic output data or support from central banks?

Erik:  We have seen that when you have emergency rate cuts, this usually causes equity markets to fall. That tells us that it is a medicine, but one that can only alleviate the pain and is not necessarily a cure. While the rate cuts can help, the bad news outweighs them.


Erik Lueth

Global Emerging Market Economist

Erik identifies investment opportunities across emerging markets. He uses quantitative models, past experience and lots of common sense. Prior to joining LGIM, Erik worked for a hedge fund, a bank, and the IMF.

Erik Lueth

Christopher Teschmacher

Fund Manager

Chris is something of a perfectionist which may explain the raft of automated spreadsheets ensuring charts are properly formatted to Teschmacher® standards. Having become the resident quiz master, he keeps his colleagues on their toes with a steady stream of investment trivia. This worldly Dutchman has wanderlust in his blood – he was born in Australia and has lived in London, New York and Paris. He has since settled in London with his young family, although regular trips to the South of France suggest that ambitions to become a vineyard owner are still strong.

Christopher Teschmacher