In theory, US and EU interest rates and low oil prices should sustain demand in the long term. But this is where the coronavirus comes in: the pandemic, in fact, in all probability will delay the response from the consumption side. Pending further developments, it may be a good idea to consider greater diversification in the portfolio geared towards safer assets. And in this sense, UBS’s proposal is divided into two fronts.
The first, of which we have already spoken, is the UBS ETF (LU) Euro High Quality Liquid Assets 1-5 Bond, interesting in this context because the composition follows the basket of securities subject to repurchase by the ECB. The second is the Swiss franc, which in phases such as the one we are going through represents a safe haven asset to diversify portfolio exposures. In general, investing in ETFs is safe, even in this case it can be said that they are two almost risk-free funds.
ECB: Quantitative Easing against the coronavirus crisis
On Thursday March 12, the ECB announced a strengthening of Quantitative Easing, with a new purchase plan for 120 billion euros within the year and a new tranche of loans to banks to support liquidity. Instead, stop interest rates, already around zero. Measures deemed insufficient: the President of the European Central Bank Christine Lagarde has been the target of criticism especially for declaring that it is not the task of the ECB to lower the spreads – “not here to close spreads”.
After a few days, the U-turn: a new 750 billion euro QE, with purchases of public and private sector securities. This move came after an emergency board meeting in conference call. The program, which will run through 2020, will also include Greek debt and non-bank commercial papers. “Extraordinary times require extraordinary actions” Lagarde commented via Twitter. All this is accompanied by another bazooka announced by the European Commission, which spoke of maximum flexibility on state aid intended to deal with the consequences of the coronavirus and suspension of the Stability Pact.
Implications of low oil prices
In addition to the difficult pandemic question, and in some way connected to it, there is the oil dossier. On Friday March 6, Russia slammed the door on the OPEC+ club and left Saudi Arabia alone to evaluate a possible new production cut. That in the end there was not.
Moscow said no to a further reduction, which from his point of view would have been another gift to American frackers. Riad has also announced an increase in extraction and a policy of strong discounts. What is certain is that the collapse in oil prices will put enormous pressure on US shale producers.
The shale oil sector is one of the main drivers of investment, employment and domestic demand in the United States, which highlights the negative implications of low oil prices. Nothing excludes that Russia and Saudi Arabia return to sit at the same table to discuss production cuts, but the times are very uncertain.
In this situation, the investment portfolio must be diversified, with securities that will be in the ECB’s purchase program and with safe haven assets to diversify exposures.
Invest in ETFs in Swiss francs
UBS’s portfolio includes two ETFs on Swiss franc issues of Investment Grade corporate bonds, one with a duration of 1-5 years and the other with a duration of 5-10 years.
The UBS ETF (LU) SBI® Foreign AAA-BBB 1-5 UCITS ETF (LU0879397742) aims to track the price and return performance of the SBI® Foreign AAA-BBB 1-5 index. Which is made up of Investment Grade bonds with fixed coupons – issued by state and supranational entities and companies – with a residual duration of between one and five years at the most.
The UBS ETF (LU) SBI® Foreign AAA-BBB 5-10 UCITS ETF (LU0879399441) aims to track the price and return performance of the SBI® Foreign AAA-BBB 5-10 index, which includes Investment Grade bonds with fixed coupon – issued by state and supranational entities, as well as by companies – which have a residual duration of between five and ten years maximum.