Last week, the World Health Organization raised its risk assessment level on the coronavirus to its highest level, officially declaring COVID-19 a global pandemic. With the virus quickly escalating in severity around the world, it remains a question of how much hurt to the economy the social distancing and locking down of cities will do. With this anticipated lack of growth and lack of inflation, will the world go into deflation (aka Japanification) or even a depression?
Over the course of two weeks, we witnessed central banks across the world following one another, essentially cutting interest rates to zero and restarted large scale asset purchase programmes to flood the markets with liquidity. Global central bankers are coordinating to place interest rates towards zero or negative, and it is now clear that cheap money is here to stay, and for the foreseeable future.
In such an environment, where can investors allocate their assets?
Many investors have been forced to look into risky assets in order to compensate for the low-yields in safe ones. With the notion of safe assets producing yield already forgone in the last decade, investors who still expect fixed-yield from relatively safe investments find themselves no better than putting cash underneath their pillow.
In terms of allocating to risky assets – with recession almost a guarantee in 2020, one might find themselves wrong-footed if they dabble in equities or commodities, particularly if the recent plunge transforms into a bear market as many economists expect.
If you have found a safe investment with good fixed-yield, hold on tight to it. Otherwise, you may find yourself out in the cold soon…
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