Advisory Client Notice

March 12, 2020

French

From both a professional and personal perspective, the global coronavirus epidemic is a source of great concern for all of us. Aside the tragic and regrettable humanitarian costs, the relentless spread of the virus also poses significant economic risk in the short-term. We are at your disposal in order to help you navigate this uncertain environment, helping to ensure that your portfolio stays aligned with your personal, long-term investment objectives.

From a logistical point of view, we have proactively reverted to our robust, pre-tested business continuity plan. Business critical staff have been divided across locations to ensure their safety and to avoid any disruption to our operations while the epidemic continues to unfold.

With regard to your assets, recent market volatility has undoubtedly caused you disquiet. Indeed, the investment context has taken an unforeseen trajectory over the past weeks with the simultaneous arrival of two black swan events. Firstly, the COVID-19 epidemic reached 120 countries at an alarming pace. The supply-side shock actuated by quarantines and business closures now threatens to metamorphose into a demand shock while authorities work towards containment. Secondly, Saudi Arabia retaliated to Russia’s refusal to participate in OPEC+ supply cuts, by ramping up its own production and flooding the market at a time when the virus has nullified demand elasticity. This caused a plummet in oil prices, which in turn could have broader economic and financial ramifications.

These unpredictable and exogenous events catalysed a mass sell-off in risk assets in what became the quickest correction ever seen. While unnerving, history has proven that the antidote to panic is a calm and disciplined approach.  Remaining focused on your long-term goals can allow you to see beyond the fog of market panic.

For the time being, with epidemiological factors still largely unquantifiable, the economic impact of coronavirus is still unknown, though it is reasonable to expect a sizable dent in near-term data and a temporary economic slowdown. Already, headlines have lathered up recessionary fear in markets. The word “recession” holds connotations of  2008, but that was not a typical recession. That was a financial crisis: a perfect storm. Today, the financial system is much healthier than it was back then and it’s important to remember that the market can live with slower economic growth in the short-term. Such events do not always lead to something more significant and sell-offs are often a natural reaction with the market trying to reprice  potential near-term earnings.

Until we have a sharper view on the longer-term growth implications, uncertainty will remain as a dark cloud over the market and further volatility can be expected. We should keep in mind that volatility is the price we pay for long-term capital appreciation and that trying to time market swings is a proven way to erode returns.

Having a diversified portfolio is always recommended and the benefits become clear during times of stress. Government bonds may have value as portfolio stabilisers and their inherent value-add, in terms of diversification, should remain on display amidst ongoing market volatility. Therefore, low rates should not discourage you from having an appropriate fixed income allocation. We also recommend that equity exposure has defensive aspects, focusing primarily on the US with a preference  for quality.

For now we would advise against ‘heat of the moment’ transactions, expecting that the situation will eventually normalise. When, is still impossible to predict and indeed the situation could potentially worsen before it gets better.

We can however, highlight some bright spots. The lack of a coordinated G7 action plan to tackle the epidemic at the beginning of March disappointed market participants, but now, economic leadership is coming to fruition. An emergency rate cut by the Fed was the firing gun on similar actions by central banks around the world, the most recent coming from the Bank of England and the European Central Bank. This demonstrates the vigilance of central banks to mitigate recessionary risks. Governments too, are emerging with economically significant stimulus packages which will complement monetary efforts. This combination of broad-brush measures (for example, rate cuts) coupled with more targeted action (such as Italy’s decision to suspend mortgage payments, or the BoE’s new facility to support bank lending to SMEs) could prove to be a potent prescription. Navigating the half-glass perspective, while avoiding the doom and gloom reflex, also highlights that some equity markets are appealing in terms of historical valuations. The fact is that, lower bonds yields and weaker risk assets have pushed equity risk premiums close to their highest levels in 10-years and implied volatility is currently at a decade-high.

For this reason, we caution against attempts at timing the market by selling stocks and moving temporarily to cash. It’s reasonable that by the time the economy has begun to recover, financial markets may already have priced it. For the time being, we feel that the most prudent strategy is to maintain a balanced portfolio that can be adjusted, within the designated risk parameters, in order to reach long-term investment goals.

We continue to monitor the market context intensively. Any changes to our Asset Allocation will be communicated.

Author: Group Investment Office