The private markets hedge

06 March 2020

5 minute read

By Gerald Moser, London UK, Chief Market Strategist

The outbreak of the coronavirus and its potential drag on growth has hit many asset classes, most notably oil. Meanwhile, private markets have been largely unscathed. With more periods of elevated volatility likely this year, exposure to private markets may help limit the impact of such turbulence on portfolios.

Alternative assets are probably reacting most to the expanding coronavirus epidemic. Indeed, at one end of the spectrum there is commodities, a globalised, short-term driven asset class, while at the other end private market investments are unaffected by this, relatively short-term, disruption.

Oil and gold’s diverging reaction

Commodity assets have diverged of late between those exposed to growth and precious metals. The oil market remains very exposed to any growth scare. The balance between supply and demand for oil is fragile at the moment. While tensions in the Middle East in January pushed prices higher as the market worried about reduced supply, the coronavirus outbreak has seen China’s demand for the commodity plunge. As China is the largest buyer of oil in the world, this explains the large fall in oil prices in the last few weeks.

Contrary to other financial markets like equities or bonds, the oil price reflects the true supply and demand situation for the underlying commodity at any point in time. It does not trade on anticipation of more fiscal stimulus or monetary easing.

In the short-term, we do not expect prices to rebound strongly. But with fiscal stimulus being announced by various governments and the Organisation of Petroleum Exporting Countries and allied producers (known as OPEC+) potentially reducing output in the short term, the oil market is set to be back in balance later in the year.

We pointed out in our Outlook 2020, in November, that gold should offer welcome diversification in a portfolio context in case of uncertainty affecting financial markets. While the oil market has suffered from the coronavirus outbreak, gold benefited from the uncertainty the virus created in regards to economic growth. The fall in US real yields in the US also helped push gold prices higher. We continue to like the commodity as a strategic diversification in a portfolio, adding protection against uncertainty and geopolitical risks.

The opportunity cost of holding gold falls

But little impact on private markets

The current episode of market stress illustrates the benefit of also adding private investment into a portfolio. Public markets are experiencing heightened volatility as the economic impact of the coronavirus remains uncertain. Meanwhile, private markets are not affected to the same extent. Unless the economy descends into a severe recession, which we think is unlikely at that stage, private markets should continue to fare well.

The current environment might provide opportunities to find better-priced deals for funds with cash to deploy and if the situation deteriorates. For instance, there might be selective opportunities in distressed debt. But in general, periods of heightened volatility strengthen the case for taking a long-term view in a portfolio through an allocation to private markets.


Market Perspectives March 2020

Financial market sell-offs, on concerns over the impact on growth of the spreading coronavirus, dented a strong start to the year and highlighted the attraction of diversified portfolios.


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