Insights Investment

In late 2019, a new strand of coronavirus, later named COVID-19, was reported to the World Health Organization  (WHO) in the Chinese city of Wuhan. The first death from the virus was recorded on January 11 and a few days later the WHO confirmed a case had been identified in Thailand. Within a few months the virus had spread around the world, with government-imposed lockdowns and travel restrictions causing global economic activity to slump.

The US Federal Reserve cut its target rate by 150bp in Q1 and restarted its quantitative easing program on a vast scale. Treasury yields plunged, with the US 30-year Treasury briefly moving to a yield below 1%.

On August 21, 2020, following an extensive review, Fed Chairman Jerome Powell announced that the central bank would shift to a new policy framework¹: flexible average inflation targeting. This will see the Fed continue to target inflation at 2%, but over longer periods. The implication of this change is that monetary policy is likely to remain at highly stimulative levels for a considerable period of time.

Corporate issuance started to climb in March as the coronavirus crisis led corporate treasurers to build liquidity buffers in anticipation of an uncertain future.

After initially plunging, equity markets bounced upwards. This was initially driven by a narrow rally in technology names seen as likely to benefit from an acceleration in the trend towards online shopping and working from home.

Pension plans experienced a rollercoaster year, but funded status ended the year lower than when the year started. The average funded status of all three of our pension indices declined over the year.

We observed that pension plans with higher allocations to LDI experienced significantly lower volatility, and funded status declined only marginally throughout the crisis period².

Until the Fed stepped into markets, the freeze in Treasury and credit markets was acute, and it became difficult to trade for an extended period. The market experienced a material increase in bid/offer spreads, leading to large price differentials even within bonds of similar credit quality and risk.

Biden Presidency is likely to be significantly different to that of President Trump, and the election was thus a key event for 2020. We expect the priority to be normalizing relations with the EU, and to focus on climate change, but to keep pressure on China.

In 2020 the volume of outstanding impact bond issuance breached $1 trillion and the market continues to grow robustly. The asset class broadened beyond green bonds, with new types of bonds covering issues from gender equality to marine ecology³.