Aviva Investors expects that the containment measures imposed because of the Covid-19 virus will result in the deepest global recession of the post-war period. The medical shock is still evolving and growing; the scale of the economic shock has yet to be felt fully, but it will be unprecedented in depth.

The exact scale of the contraction is impossible to forecast with any accuracy given uncertainty around the evolution of the spread of the virus, the way in which governments and individuals respond to that through social distancing, the economic implications and the monetary and fiscal response to alleviate the situation. However, a decline in global activity of between 10 and 20 per cent in the first half of 2020 is plausible. While risks are tilted heavily to the downside in the short term, activity is expected to begin recovering quickly in late 2020 and early 2021.

The unprecedented monetary and fiscal policy response is a collective attempt to minimise lasting damage from the lockdowns and to try and ensure that resources can be redeployed when activity recovers; hopefully in the second half of 2020. But they can only cushion the blow—there will inevitably be some longer-term impairment.

In such challenging conditions, our investment strategies should aim to preserve capital and look for opportunities where balance sheets are strong and where good quality assets have been oversold.

Michael Grady, head of investment strategy and chief economist at Aviva Investors, said: “We have increased our preference to be overweight government bonds, reflecting our view central banks will continue to act to maintain easy monetary conditions, and at the same time allow fiscal space to be created without higher yields. Our modest underweight equity allocation reflects our concern that economic weakness will translate into historically weak corporate earnings in 2020, which we do not think markets are fully discounting at this time.

We have moved to a more cautious stance in our currency allocation, with a preference to be long Japanese yen and short other Asian currencies. We have a neutral view across credit, where corporate bonds spreads have widened sharply, but where there is now significant support from central bank asset purchase programmes.”

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