FOR PROFESSIONAL FINANCIAL ADVISERS ONLY
As we have said in the previous updates, news concerning the Coronavirus is inescapable. We collectively know as much as each other about the trajectory from here, so there seems little point in us commenting further on it other than to say it remains first and foremost an unfolding human tragedy.
What we do feel able to speak about are the markets. Watching the wild gyrations of the equity, bond and commodity markets and all their derivatives can be a gruelling experience. The various experts and talking heads, which up until 20th February were in the main urging people to buy risk assets, have gone silent. The ‘buy the dip’ strategy, which had worked so well for a decade, has come to a grinding halt.
To restate the obvious – markets hate uncertainty and we have reached a new high in uncertainty as more countries restrict, lockdown and quarantine their populations. We will have to see if the first potential vaccine trialled on a human (Monday 16th March) or the new 10 minute and only $1 test change the outlook, or at least the narrative, around where we might go from here.
Human beings naturally feel they need to take action to regain control of a situation and dealing with market turbulence is no different. We had said for some time that we thought equity markets, and especially the US, were overvalued relative to their peer group and their own history. The time for ensuring we had diversified investments was before February 20th not after it.
We have always reviewed all IBOSS investments on a daily basis and we continue to do so. The upshot is we have three options today just as we do every day. We can increase short term risk by buying any of the risk assets, we can decrease risk by selling risk assets (all of which have significantly repriced) or we can sit tight and do nothing. Either of the first options imply that we have suddenly developed a new skill for short term market timing; we have not.
Over the last eleven years we have delivered strong risk adjusted returns by neither going gung-ho when there has been market euphoria nor becoming (in our opinion) too defensive against backdrops such as the end of GFC or the Euro crisis.
We now, finally, have a backdrop where there is a rapidly building global consensus to throw the proverbial kitchen sink at the virus both from both a health perspective but, increasingly, an economic one. We have been saying over the last few weeks that the central banks have limited fire power because they used it to support markets when markets were already thriving. What hasn’t really happened up to date is the bazooka equivalent of a fiscal/ governmental response.
We can expect this situation to change dramatically over the coming weeks and months. In our opinion all countries will begin to offer tax breaks, payment holidays, additional loans etc. In summary, nothing will be off the table. Modern Monetary Theory is about to be tried on an unprecedented scale.
The Americans realised the extent of the viral threat late and, arguably, the UK government also dragged their feet, but all that has changed. Those in positions of economic and political power are no longer in denial, which means that collective action is easier and quicker to enact. Expect the unexpected and unprecedented amounts of it.
The many available maps and statistics demonstrate that the measures taken in areas like China, and particularly South Korea, have had a significant and positive impact on the trajectory of the virus outbreak. If they can sustain this trajectory then the whole world’s markets will see a possible end, even if its months away. The journey may well be even more volatile than even the markets, but we will get there in the end. In the meantime, we believe we have the correct asset mix and exposure to some of the best underlying managers. This should give us the capability to capitalise on what are, in some cases, super distressed assets. It is worth considering that nobody knew the best time to buy risk assets was in March 2009, a period where things looked extremely bleak indeed. Every time a market effectively crashes the situation has both similarities and differences from all previous ones. The timescales for the falls vary, as does the recovery, but in the end they always do.