The Secret CIO on COVID-19

Channels: SAA/ALM, Risk, Regulation

As markets sink, a chief investment officer at a European insurer tells Vincent Huck how the pandemic is affecting its thinking.


 

The COVID-19 pandemic is posing serious questions on governments' leadership ability in time of crisis and the resilience of health systems worldwide.

Beyond the most important human aspect, markets are in disarray, with Wall Street stocks dropping by 10% today (16 March) and the FTSE 100 by 7% taking the London index to its lowest level since 2011.

The economic impact of the pandemic could be long-lasting and it is something that all chief investment officers (CIOs) are now having to deal with.

A CIO at one of Europe's largest insurers shares the concerns though it seems the market slump is not as bad for his company as perhaps for others. "We are in a way in a luxurious position because we have a very strong portfolio, so it is not something that we are particularly worried with."

All the firm's expectations, modelling and scenario analysis are done to counter this kind of event, the CIO continues. "But the key question is: 'do you need to do anything?'. In other words, it is about assessing whether things are going to get worse or not."

The firm was lucky in a way, the CIO says, as it decided to cut exposure to equity at the end of last year. "We are still losing money, and I don't like losing money, but we are probably outperforming peers who might be more exposed to risky assets."

The first step, and importantly so, is with staff, the CIO continues. To ensure they are all informed and that the company is taking the necessary measures to avoid contagion. As regards the asset side—uncertainty is the major factor the insurer will be grappling with in the near future.

"We know it is going to have a significant economic impact but there is quite a lot of debate around the nature and scale of that which is not so clear at the moment," the CIO says.

Citing shop closures in North Italy and some regions across Europe being in complete lockdown, the CIO adds: "What type of impact does it have, and will we see stimulus, I don't know. Although there has been some indication from [Angela] Merkel that she is going to do whatever it takes... she is using [ex-president of the European Central Bank] Mario Draghi's words which, in itself, is quite interesting."

"Will that mean that there are going to be significant fiscal measures in order to stimulate the economy?" the CIO asks.

European leaders have heeded the concerns. Two days after these comments, Christine Lagarde, current president of the ECB, announced "an ambitious and coordinated fiscal stance" would be needed in view of the weakened outlook and to safeguard against further downside risks.

Following the comments, central banks in in Canada, the UK, Japan, Switzerland and the eurozone launched a "coordinate action" to keep liquidity in markets, by cutting pricing on standing US$ liquidity swap arrangements by 25bps.

At the same time, the US Federal Reserve cut rates by 100bps and vowed to buy up to $700bn of bonds.

In Europe, some governments banned short selling. In Australia, authorities reduced maximum allowable trading volumes. In Seoul, South Korea's government has an emergency budget planned.

Despite the interventions share and bond markets have remained volatile and confidence looks frail.

"They are many uncertainties," the CIO summarises. "But one of the big question marks is what will happen in the US where 25% of the population has no health care or job security."

A quarter of the US population has an incentive not to report themselves ill or get tested for COVID-19, the CIO continues. "We might see a much larger outbreak in the US than anywhere else."

The CIO believes a major turning point is likely to be when the grim situation Italy is going through at the moment reaches other larger, economies.

"The atmosphere at the moment in London is pretty relaxed compared to Milan, with some people working from home and less busy public transport. But what happens in three weeks time when more people are dying and the UK's health system is imploding?"

The current market valuations could be argued as being already conservative, but the emotional impact of the situation is likely to dictate actions in the future.

"So how rational can you be? Rationally I think the market valuation is correct, but then you have a lot pain and grief around you. So, I'm just trying to do psychology and behavioural analysis on what will happen to the markets when people are really hit directly and indirectly, because, traders and portfolio managers are humans, and they will be affected like everybody else."

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