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RESEARCH • 17 March 2020
COVID-19 update: risk-off-led sentiment to sustain
The retail, leisure and hospitality sectors are likely to suffer most due to the COVID-19 outbreak. In the current environment, the importance of secure income streams and reducing exposure to overleveraged strategies is crucial.
- Risk-off sentiment is to remain in the short-term as global governments rely on fiscal and monetary policies to support economic growth. COVID-19 is set to underpin a downgrade in global economic growth as a U-shape recovery becomes increasingly the base case.
- The extension of the lower-for-longer narrative provides some support to real estate amid low bond yields, but downbeat equity markets globally may have a worrying impact on corporate profits and, hence, tenants’ ability to support current rental levels.
- There is also the denominator effect on real estate allocations, as valuations are slow to reflect the full impact of the downturn.
- The downturn itself will also be influenced by the quantum of defaults (both tenant and banking covenants). This is an area to monitor, as well as the impact on employment trends.
- The retail, leisure and hospitality sectors are set to bear the brunt of the COVID-19 outbreak. Risk aversion is likely to drive some short-term tightening in the credit market, which highlights the importance of secure income streams and reducing exposure to overleveraged strategies.
