What's our COVID-19 Market Outlook

Market conditions have always been dynamic, but the recent COVID-19 pandemic has sowed more fear and uncertainty to those who have placed a good amount of investment in unit-linked policies. For your peace of mind, we created an FAQ guide to help you understand your options for your existing unit-linked plans.

COVID-19 has been declared as a pandemic as infections spread on a global scale, meaning we are not experiencing this in isolation. This has impacted economies across the world, putting a stop to the longest-lasting equity bull market into a recession of historic proportions.1 Needless to say, economic activity has dwindled and puts up a question on the depth and duration of the market downturn we are currently experiencing.

In the US and Europe, economic activity is expected to contract as supply chain disruption is coupled with reduction in domestic and foreign demand.

In Asia, China has already seen a decline in the growth of new cases and is moving towards economic recovery. However, rising numbers in other parts of Asia could further contribute to supply and demand shocks.

In the Philippines, a lockdown has been implemented in the entirety of Luzon in order to contain the spreading of the virus locally.

What is important to note is that the Philippines is not alone in facing this crisis – the COVID-19 pandemic is expected to cause a global economic slowdown and will recover depending on the duration and depth of the coronavirus crisis.

The speed and depth of the downturn seems more severe because the constraints are physical, not financial - production and consumption of goods was on-going and the only hindrance was the difficulty in financing them. On the other hand, currently, no matter how much money you have, you just cannot purchase goods and services because no one is offering them.

In different parts of the world, expansionary monetary and fiscal policies have been proposed and most implemented. These include loan/payroll subsidy for businesses, industry-focused and tax relief programs, as well as liquidity injection into the economy through quantitative easing and interest rates cuts.

Locally, the BSP slashed policy rates by 50 points to 3.25% as well as a 200-bp cut in bank reserve requirements down to 14%. The legislative chamber has also approved the “Bayanihan to Heal As One” Act which authorizes the President to exercise powers in dealing with the health situation “for a limited time and subject to restrictions” amounting to nearly Php 275 billion of the national budget on top of the Php 27 billion stimulus package to provide reinforcement to the Department of Health and economic relief to businesses and livelihood affected by the disease.

There is no clear timeline as to when the pandemic is expected to end given that no treatment is available to those who are infected. A vaccine is still yet to be developed as of the moment.
The current market trend suggests that uncertainty remains a key factor and global economic slowdown is expected in 2020 with growth dropping to as low as 1.5%. Locally, country’s GDP is estimated to grow at a range of -0.6% to 4.3% depending on the duration of the lockdown.
We expect volatility to persist as the COVID-19 infection cases have yet to peak, with equities as the primary asset affected by the event given that companies remain minimally operational, if not closed, and domestic consumption falling drastically. Outlook remains bearish as investors are perceived to be cautious as the fear factor continues to influence public consumption and supply chain disruptions inhibit business production.
In the mid-term, all eyes are on the trend of confirmed cases and the success of development of treatment and vaccine. The impact of monetary and fiscal stimulus implemented by the local and foreign governments around the world is also a key factor in determining the trajectory of the future of economic activity, and ultimately, the investment market.
There is a temporary sharp supply and demand pause for the global economy rather than a complete derailment. However, the timing of a return to more normal trading patterns remains unclear. While the economic background lacks certainty, it may expedite longer term structural trends to which we already have exposure. In addition, companies delivering digitalization are likely to benefit from work-from-home policies. Prolonged absence of cash flow when companies are highly indebted is a source of potential risk, from which our bias towards low leverage in stock selection would provide protection. Overall, generating good performance will require active investment and avoidance of risk.
Global central banks are expected to do more to ensure that markets remain functional and avoid liquidity stress in their respective economies; Asian governments have also announced emergency fiscal packages to offset negative growth pressures and to ease some of the market uncertainty. In Asia, with macro developments remaining extremely fluid and markets vulnerable to further risk-off episodes, it is recommended to wait for market sentiments to regain a firmer foothold before looking for valuations opportunities that have emerged in this correction. Better quality names are preferred as they are better able to weather the current market turmoil. With the same heightened volatility also echoed in the rates market, we will also continue to monitor overall duration positioning.
The strategy has performed as expected during this period of volatility, providing downside protection due to its exposure to US high-yield bonds and convertibles, which have defensive characteristics that help buffer downside participation when US equities come under pressure. We remain constructive in the intermediate-term outlook.
The base case is for a short and sharp economic downturn in China with recovery starting in Q2. We expect there will be further stimulus measures both in China and around the region in the form of easier monetary policy and/or higher fiscal spending, which should provide support for equities. Valuations are now at more attractive levels and Asian high yield credits have been relatively more stable. Returns should continue to be supported by high interest accrual. We will continue to focus on shorter-dated higher quality bonds for income accrual.
Source: Allianz Global Investors
The Fund assumes an overweight duration relative to the benchmark amidst continued monetary easing globally and domestically.
The Fund assumes a neutral duration as investors shy away from emerging market (EM) assets but accommodative monetary policies will keep rates supported.
The Fund assumes a defensive stance with equity position below strategic allocation levels and keeping significant cash (12-13%) undeployed in order to mitigate the impact of market decline.
The Fund is overweight on fixed income and underweight in equities to mitigate the impact of market decline amidst continued monetary easing globally and domestically.
Each of the funds have reduced equity positions while maintaining increased cash allocation in order to mitigate the impact of the decline in the equities market. Recovery hinges on the duration and depth of the impact of the pandemic alongside the effects of the policies implemented by the government.
While the fears of further market decline in times of extreme volatility are currently lingering in the minds of policyholders, experienced investors will not advise cutting down on losses on the basis of events like these which are temporary. Long-term investors know that markets generally grow in the long run. As tempting as it may seem, moving out now will set up a psychological barrier to coming back in and this can jeopardize your long-term returns and risk long-term goals. Don’t turn a temporary paper loss into permanent damage to your life goals. Remember too that surrendering unit-linked life insurance policies may carry surrender charges that you must take into account.
Current prices provide potential buying opportunity as most stocks are trading below average levels; however, markets can bottom here, or it could turn out for the worse. Experienced investors will not empty their arsenal too quickly. Take it slow. Deploying your money in tranches may allow you to increase your holdings at a lower average cost and reap the future benefits as you ride up the upward momentum once the recovery phase begins.

The stock market is like a roller coaster that has an instant “stop” button for riders to stop the ride and unstrap themselves. At points there will be fast and furious plunges as well as run-ups, and eventually complete the ride. The worst thing you can do is to slam that “stop” button because you will fall right out and be seriously injured, or worse.

As counter-intuitive as it seems, it is best that you stay informed with how markets are performing, and depending on your risk appetite, you can multiply your investments, or choose to stay away until the markets stabilize. Remember too that in these uncertain times, it is best to remain insured. Unit-linked life insurance policies guarantee certain benefits that may exceed the investment component of your policy. Don’t panic! Think long term.

Most importantly, take care of your health and practice proper hygiene and social distancing. Worrying about investments is futile if you’re putting your life at risk.

We are all in this together and we will weather this volatility towards achieving our long-term goals.

Disclaimer: This report is for information purposes only. This does not constitute an offer or a solicitation to buy or sell any investment referred to in this report. All information is based on carefully selected sources believed to be reliable, but we do not make any representation as to its accuracy or completeness. Investment in any of the funds is subject to risk and possible loss of principal, and is not insured by the Philippine Deposit Insurance Corporation (PDIC). Losses, if any, shall be for the account and risk of the Policyholder. Past performance is not indicative of future performance.
1 Karunakar, R., & Sarkar, S. (n.d.). Global economy already in recession on coronavirus devastation: Reuters poll. Retrieved from Reuters