Evidence so far suggests that social distancing is a painful but successful step to contain the virus. There is light at the end of the COVID-19 tunnel. Meanwhile, the policy response to counteract the economic damage is already helping markets stabilize and will help ensure a faster path to recovery once normal life resumes.
With central banks going all-in, interest rates should remain low well after COVID-19 is behind us, which makes duration attractive even with 10-year yields below 1%. Fixed-income should continue to play a strong diversifying role in balanced solutions despite the mid-March hiccups. Down the road, taxpayers and investors will have to debate on who foots the bill for this healthcare crisis. Unless central banks permanently let the size of their balance sheet balloon and decide to kick the debt can down the road, 2021 could be the year for the great underweight in bond duration.
Although equities are still exposed to downside risks if the economic shutdown was to linger late into the year, our base case remains for the economy activity to slowly reopen in the coming months. We look to rebuild our equity overweight as we get more clarity on the timeline of the economic shutdown.