An unexpected ominous quarter

Initially 2020 was an optimistic one for financial markets as the geopolitical risks, which dominated markets and investors’ sentiment in recent years faded in the last quarter of 2019. In addition, bond and equity markets closed 2019 on a high as various factors such as lower interest rates in the US lifted investors’ sentiment. However, this positive stance was reversed as markets started to grow uneasy as the pandemic unfolded and gained traction in Asia. Markets fluctuated heavily as people in Europe contracted the virus and death rates increased. Various businesses are shut, most air travel is at a halt and governments are encouraging companies who can work remotely to do so.


Needless to say, financial markets do not wait for companies to publish their earnings to get a better understanding of the financial damage the virus will have on the business community. Financial markets try to anticipate economic growth and policy direction and that is clearly what has happened in recent weeks. The strong decisions from various governments both from a health perspective and fiscal stimulus are all aimed to keep people safe while at the same injecting confidence through the tools which nations and their central banks have at their disposal.


Global Equity Markets

Global equities plummeted amid the coronavirus outbreak; which was declared a global pandemic by the World Health Organisation. This forced businesses to shut down, while unemployment is expected to balloon. In the US, millions of Americans have become redundant as applications for unemployment insurance increased rapidly towards the end of March.


In Europe, equities logged their worst quarterly performance since 2002 as the Euro STOXX 600 index declined by 23%. Travelling restrictions were imposed and parts of the economy were shut down to help minimise the spread of the virus. Governments across Europe issued aid packages for businesses to contain unemployment, while at the same time assist businesses which were negatively impacted and generating little to zero revenues in the current scenario.


The European Central Bank also announced its plan to buy €750 billion worth of bonds to avoid a market meltdown and to support hard-hit counties. In addition to this, the G20 leaders of major economies have also agreed upon the injection of over $5 trillion into the world economy to reduce business redundancies across the globe.


In the US, the Dow Jones recorded its worst quarter since 1987 as it was down by 23.2%. Similarly, the S&P 500 dropped by 20% – recording its worst quarterly performance since the financial crisis. The Nasdaq Composite also registered a 14.2% quarterly decline, being its worst quarter since the end of 2018.

The volatility index, a measure of market fear, soared to a record quarterly gain given the unprecedented volatility. The index also reached a high since November 2008.


Sovereign Bonds and Credit

During the first quarter of the year sovereign bonds proved to be very volatile despite generally closing the first quarter higher (lower yields) as investors ultimately sought shelter in high quality assets. At one point many of us questioned the diversification benefits of sovereign bonds as 10-yields on US Treasuries, German Bunds and UK Gilts rose sharply towards mid-March.


Finally sovereign debt ended the quarter generally higher as the US 10-year treasury yield declined to 0.7%, the UK’s 10-year gilt yield finished at 0.34% and the German 10-year Bund ended the quarter with a negative yield of 0.4% yield.


In the periphery of Europe, Italy’s 10-year bond yield increased to 1.5% slightly higher than where it was in the beginning of the year, but lower than the 2.3% yield reached towards mid-March. Yield on Spain’s same maturity debt increased by 20 basis points as it stood at 0.66%.


Across credit, investment grade (IG) and high yield bond prices declined (and yields increased), with price movements across IG or good quality bonds surprising many. However, many have attributed the declines in IG to the lack of liquidity in the market during this particular period. On the other hand, movements in high yield bonds were significant but not surprising, as the asset class has historically showed strong correlation to equity markets when panic selling hits market. Euro large cap IG bonds shed 6.3% during the quarter, while Euro high yield bonds declined by 15%. USD denominated high yield bonds lost 11.2%.


Local Market

This time round, the local equity and bond markets were not immune to the negative health and economic impacts brought about by the virus. Businesses selling non-essential goods and services are temporary closed or offering limited services. Air travel is kept at a minimum and many are following strict guidelines as advised by health authorities. As a result, various businesses linked to tourism and hospitality have been hit hard. Demand for real estate, one of the sector which benefitted the most in recent years as tourism and international demand boomed, is also believed to have slowed down.


Selling pressure across local equities increased, as the MSE Equity Total Return Index recorded a 19% loss as large cap equities, such as Malta International Airport plc, the two largest banks and International Hotel Investments plc all closed in negative territory. In addition, yields on both local corporate bonds and sovereign debt were generally higher as market participants revised their bid prices lower and requested higher yields on their investments, in view of the fact that the economic damage is still a big unknown.



Throughout the quarter, the Bank of England lowered its short-term interest rates by 65 basis points to 0.1% in a move to make cost of capital cheaper amid the current environment. As a result, the British pound reached a multi-decade low against the US dollar and lost 4.4% against the Euro. On the other hand, the Euro was down by 1.6% to $1.1031 against the dollar as this volatile quarter ended.


In recent weeks some have compared the situation to another Great Depression. While the negative impact on global economies and individuals is inevitable, governments are committed to contain the damage through unprecedented fiscal measures. This together with the current welfare system and advances in technology will possibly help the world avoid a Great Depression scenario. While we remain mindful of risks we strongly believe that opportunities have been created which will help investors improve the quality of holdings in their portfolio.


Very often, both before the pandemic and during the past abnormal weeks, we wrote about the importance for investors not to take decisions concerning their investment portfolio in a rush. While nearly all asset classes headed downwards, and we can understand the anxiety this may bring, investors should keep in mind their time horizon and risk profile. If a reassessment of the latter is required following the volatility we witnessed in recent weeks, investors should do so to align their portfolios with their risk tolerance.


Lianne Zahra is a Trader at Jesmond Mizzi Financial Advisors Limited. This article does not intend to give investment advice and the contents therein should not be construed as such. The Company is licensed to conduct investment services by the MFSA and is a Member of the Malta Stock Exchange and a member of the Atlas Group. The directors or related parties, including the company, and their clients are likely to have an interest in securities mentioned in this article. Investors should remember that past performance is no guide to future performance and that the value of investments may go down as well as up. For further information contact Jesmond Mizzi Financial Advisors Limited of 67, Level 3, South Street, Valletta, on Tel: 2122 4410, or email [email protected]