GMO Spotlight | 22 April 2020

COVID-19 Market Views

During these turbulent times, our primary concerns are the well-being of our clients, employees, and business partners and the effective stewardship of our clients’ capital. Portfolio managers and research analysts across GMO are leveraging our diverse expertise to continually discuss our views of events and the potential impacts of COVID-19. Below are some of our most recent views.

Multi-Asset Class

James Montier, Portfolio Manager, Asset Allocation Team

As of March 25, 2020

While it is, of course, a cliché to say that markets are driven by fear and greed, like many clichés this one contains a strong element of truth. The bad news for us humans is that within our brains, emotion appears to have primacy over cognitive function. While this may well have kept us alive and allowed our species to thrive, this uncomplicated hierarchy doesn’t necessarily work in our favour when it comes to thinking about financial markets.

Read the full white paper “Fear and the Psychology of Bear Markets”

Learn more about GMO’s multi-asset class capabilities.


Tom Hancock, Head of Focused Equity Team & Portfolio Manager of Quality Strategy

As of March 19, 2020

The COVID-19 coronavirus pandemic has moved from being a China-specific concern to becoming a global threat to health and economic growth. GMO’s Focused Equity team considers a global recession highly likely (and we have now been joined by the consensus). We have been active in the market, buying more defensive names in the early days of the coronavirus period when we thought the risks were underappreciated, while in recent days adding to some underperforming holdings and new positions where we feel the market has gone too far. Outside of the most obviously affected sectors, market selling has been somewhat indiscriminate, which means there is an opportunity to add to the best companies at attractive prices. We are excited about the long-term outlook and will not try to time the short-term bottom of the market.

Learn more about GMO's Quality Strategy.

Lucas White, Portfolio Manager, Climate Change Strategy

As of April 2, 2020

We have taken advantage of the recent volatility and repositioned the Climate Change Strategy a few times since the beginning of this bear market. Some companies, such as electric utilities, have held up relatively well, while others have seen inordinately large declines in their share prices, such as agriculture and copper companies. Nothing about the COVID-19 pandemic itself affects the long-term secular trend toward investment consistent with adapting to and mitigating climate change.

Learn more about GMO's Climate Change Strategy.

Lucas White, Portfolio Manager, Resources Strategy

As of April 2, 2020

  • Russia and Saudi Arabia failed to agree on a production cut at the OPEC+ meeting in early March, and Saudi Arabia intends to respond by increasing production, which caused a sudden 30% collapse in oil prices.
  • Much of our Oil & Gas exposure is to the Russian energy companies. The cost of production of oil in Russia is extremely low, and the Russian producers can withstand the lower prices. The higher-cost producers, notably the U.S. shale players, will be at a significant disadvantage if these prices hold. We have no substantive long exposure to the higher-cost U.S. shale industry in either of our strategies. In Resources Long/Short, we have significant short exposure to U.S. shale.
  • The long-only Resources Strategy is underweight oil relative to its benchmark and other resources strategies. We maintain this underweight for risk management purposes, and we have not significantly changed our position in light of these big price swings.
  • Our Resources Long/Short Strategy is net short Oil & Gas Exploration & Production, Energy Drilling, Equipment, Services, and Tar Sands & Heavy Oil. This positioning has been favorable for performance.

Learn more about GMO's Resources and Resources Long/Short strategies.

Binu George, Portfolio Strategist, Emerging Markets Equity Team

As of April 22, 2020

We have analyzed the impact of COVID-19 across both our Quantitative and Fundamental strategies within GMO’s Emerging Markets Equity team. We believe that the big three EM countries (China, Taiwan, and Korea – accounting for about 64% of EM) continue to be ahead of the curve relative to other emerging and even most developed markets. While this provides some comfort at the asset class level, our analysis also suggests a wide divergence in individual country impacts from COVID-19. In Q1, MSCI China lost 10.2% while MSCI Brazil dropped 50.2%. Countries matter, especially in emerging markets, and in country allocation (just as in stock selection) we carefully weigh the tradeoff between drivers such as Value and Quality.

Learn more about GMO’s Emerging Markets, Emerging Domestic Opportunities, and Emerging Liquidity Premium strategies.

Amit Bhartia, Portfolio Manager, Emerging Market Equity Team

As of April 16, 2020

As Covid-19 continues to dominate headlines around the world, we have been working to develop a methodology that will help us position our portfolios as we deal with the current and coming shocks to Emerging Market economies. We believe assessing the unique risk factors that the virus brings along with understanding a country’s ability to mitigate those risks is key to determining how well that country will navigate the current crisis. This paper introduces the framework we have developed to further help us make the best decisions for positioning our portfolios.

Read the full white paper “COVID19: Risks and Resilience in Emerging Markets.”

Fixed Income

Tina Vandersteel, Head of Emerging Country Debt Team

As of March 30, 2020

COVID-19 appears to be a somewhat differentiated shock among the kinds of shocks that ultimately have had only temporary effects on global growth and globalization in general (e.g., 9/11, Fukushima, SARS/MERS, and others). So far, we think we know that spread via asymptomatic patients, lengthy incubation periods, and an increasing likelihood of prolonged, imposed quarantine or self-quarantine measures will dent global growth. Key for risky assets like emerging debt is:
1. will such a dent be temporary, like the other episodes above, or
2. will trend global growth suffer permanently if de-globalization is accelerated?

In very select cases of emerging countries without likely access to international support, we’re monitoring whether any temporary shock turns any liquidity/rollover needs into a restructuring scenario. We also are considering carefully the impact on the U.S. election, with feedback loops/substitution effects via equity markets onto other risk assets like emerging debt.

Learn more about GMO's Emerging Country Debt and Emerging Country Local Debt strategies.


Jason Halliwell, Head of Systematic Global Macro

As of April 1, 2020

During February, as the scale of the COVID-19 problem grew, it started to become obvious to us that the market was underpricing risk. Our strategy is systematic, but that does not absolve us of the need to keep thinking about market risks and opportunities that the models might not be capturing – and take action when necessary. COVID-19 has presented us with a case where we determined that such a manual override was warranted. So, during February we gradually reduced our market exposure (at very favorable prices) down to a beta to global equities of around -0.1 at the start of March. Our timely action has helped us outperform markets over the volatility of the past couple of weeks. We continue to believe that the market still has not fully priced in the risk and that there is a significant chance of further falls in the coming months.

Learn more about GMO's Systematic Global Macro and Systematic Global Macro Major Markets strategies.

Jon Roiter, Portfolio Manager, Credit Opportunities Strategy

As of March 27, 2020

Along with risk assets across the board, the high yield market is currently undergoing a dislocation the magnitude of which occurs only once every decade. Uniquely for high yield credit, returns can be scenario-tested based on discrete cash flows because either coupons and principal are paid or bonds default and creditors recover on the claims. GMO has developed a stress test for the high yield market that demonstrates that while the bottom may not yet be in sight, the sell-off is being overdone given the high yield market can deliver positive real returns through a cycle even under draconian default and loss assumptions. Accordingly, there is shelter in credit. Meanwhile, if heightened volatility subsides, we believe high yield bonds are priced to deliver substantial total returns. Security selection can add incremental alpha as the good is abandoned indiscriminately with the bad and the ugly as people distance themselves from risk. If history once again rhymes, then we believe the return profile for high yield to prove superior to equities post this historic drawdown.

Read the full white paper “Shelter in Credit”

Learn more about GMO's Credit Opportunities Strategy.

The views expressed are the views of the respective teams through the periods specified above, and are subject to change at any time based on market and other conditions. This is not an offer or solicitation for the purchase or sale of any security and should not be construed as such. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities.