Investors were already worried that the ongoing coronavirus outbreak would damage the global economy, but the oil price war between Saudi Arabia and Russia has made this an “evens favourite”, asset allocators have warned. 
Oil prices were down by around a third at one point on Monday, their biggest loss since 1991, after a row between Russia and Saudi Arabia led to the Middle Eastern state pledging to ramp up oil production.
The oil price war comes at a time when investors are struggling to deal with the escalating economic repercussions of the spread of the Wuhan coronavirus, which is also known as Covid-19, throughout Europe and the rest of the world.
Jeff Schulze, investment strategist at Legg Mason affiliate ClearBridge Investments, said: “This weekend’s launch of an OPEC+ price war is one of the three worst possible shocks for markets engulfed by the COVID-19 crisis. The other two would be a hypothetical lockdown of parts of the US economy and a second wave of infections in China.”
Oil price over 2020
Source: FE Analytics
As a recession appears to become more likely, central banks and government policy makers are expected to step in to support the global economy, with the Bank of England this morning announcing an emergency rate cut. This follows a similar cut by the US Federal Reserve last week.
Schulze added that he believes “the odds of a recession have risen materially” and expects the Fed will cut rates in the upcoming March meeting by another additional 50 basis points to cushion what he described as a “deteriorating” economic situation.
Jim Wood-Smith, chief investment officer, private clients at Hawksmoor Investment Management said: “Global recession has moved from being a very long odds outsider to being evens favourite.
“The Saudi issue is the accelerant on a fire that was already burning well enough of its own accord. The coronavirus has plenty of its own fuel and it is right that we have to react to the worsening of the economic prognosis.”
Hawksmoor’s response has been to lower risk in its portfolios and reduce its equity weights “towards their strategic minimums”.
“The coronavirus is a genuine threat to the peaceful status quo and we are reacting accordingly and appropriately,” Wood-Smith added.
Performance of equity indices over 2020
Source: FE Analytics
Some managers believe that whilst welcomed, the ammunition of central banks may not be enough to ease a recession.
Ewout van Schaick, head of multi-asset at NN Investment Partners, said: “In our view, their easing actions will do little to stimulate nominal growth. So, it’s over to fiscal policymakers but fiscal easing will almost certainly be too little or too late.”
UK chancellor Rishi Sunak delivered on this in his Budget earlier today, when he announced more than £600bn will be spent on roads, rail, broadband and housing by the middle of 2025. Sunak claimed this is the biggest level of infrastructure spend since 1955.
He also pledged a £30bn stimulus package to tackle the economic impact of the coronavirus outbreak.
As the coronavirus situation in Europe continues to worsen and policymakers step in, not all investors have de-risked their portfolios entirely, with some opting to hold off on changes for now.
Samy Chaar, chief economist at Lombard Odier, has lowered growth forecasts for all major economies, but said the firm has not been changing its portfolios’ exposure to risk assets.
Performance of gold and government bonds over 2020
Source: FE Analytics
“While we do not expect a recession, the impact from the Covid-19 epidemic is likely to be substantial, at least in the near term,” he added.
Chaar said that Lombard Odier will maintain a mix of risk assets that are likely to perform well in a recovery scenario, together with safe assets such as gold and Treasury bonds to protect portfolios during market downturns.
“While we choose to neither de-risk nor re-risk our portfolios at this point, we are closely monitoring both the evolving epidemic dynamics and the associated policy response, being conscious that in many countries, given the dynamics of the epidemic spread, news flow is likely to be negative for at least several more days,” he finished.