Thursday, July 30, 2020
Tom Mansley believes the Covid-19 crisis will not have a significant impact on the MBS market.
Even if there is a second wave of infections, will we remain out of lockdown?
Certain areas which have already seen high infections rates will likely remain open. In places where spikes persist, lockdowns may have to be rolled out again. There is a balance between using lockdowns to ensure the levels of healthcare Covid-19 patients require is in place versus the economic damage that is being done by keeping economies closed. There are certain areas in both the private and public sectors that simply cannot afford to stay closed. Tax revenues in states such a New York, for example, are projected to be down circa 30-40%, which is not sustainable.
Are we entering a ‘return to growth’ phase for markets and economies?
While the possibility of future lockdowns is very region specific, growth is very sector specific. The 11 September 2001 crisis and its impacts on hospitality and air travel, for example, provides a roadmap for what is likely to happen going forward. Other sectors, such as tech, have seen no slowdown whatsoever. Construction, which is restarting again, will be one area of growth. In the retail space, Covid-19 has accelerated an existing disintermediation trend – online purchases at the expense of visits to large shopping centres.
What does this mean for your asset class?
In our view, the Covid-19 crisis will not have a significant impact on the mortgage-backed securities market. These securities have two lines of defence. If borrowers cannot pay, there are assets securing the investment; the investment can be recouped via the disposal of the assets. In the US housing sector in particular, a supply / demand imbalance persists; there is not enough supply of homes to match demand. We have had a significant disruption which is going to constrain supply, but this will be counterbalanced by an increase in unemployment which usually decreases demand. Ultimately, however, pre-existing demand for homes remains. The consumer is going into this crisis with a very strong balance sheet, unlike sovereign and corporate balance sheets. The debt-to-income ratio of the US consumer has been declining for the last 13 years and is now back to levels last seen in 2000. On top of that, the low interest rate environment applied to low debt levels means consumer payments are extremely small – the debt service ratio is at historic lows.
The information in this document is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained in this document may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information. Past performance is no indicator for the current or future development. Reference to a specific security is not a recommendation to buy or sell that security.