Our Response to Market Turbulence

This content was originally distributed in a client update on 23 March 2020.

Given the recent turbulence in global financial markets, I would like to take a moment to update you on how we currently see the situation and outline some of the steps we’re taking in response.

In the short run, forced closures and isolation efforts introduced by governments in the UK, Europe, US and Asia will result in a significant shock to the global economy. Most of the stocks and equity ETFs in your portfolios will take a short-term hit as prices change to reflect slower growth this year during the fight against COVID-19. Diversification across global markets will help to mitigate some of the impact, as will exposure to asset classes that aren’t as sensitive as stocks to the current economic challenges.

Nevertheless, as cash flows and liquidity dry up, we expect to see a wave of bankruptcies and consolidations. Governments around the world are launching or are expected to launch unprecedented fiscal measures to soften the blow from COVID-19. Government bailouts are being considered for key industries such as airlines and rail companies. Some governments introduced measures to help small businesses and the self-employed, in an effort to avoid the repeat of the 2008 bailout program which only benefitted big corporates and “too big to fail” financials. The coronavirus took most countries and businesses by surprise—a true fat tail event.

Earlier this month we sent an update explaining how our strategy would have performed under previous selloffs and laying out our “wait and see” tactics. An evidence-based approach means that unless we have enough data points to confirm a given theory or thesis we are likely to stay put to avoid behavioral mistakes and overtrading.

The potential fallout of COVID-19 remains largely unknown at this stage. This means we will be prioritising assets that provide relative safety vs. the broader market. What we will not do is try to time the recovery and guess which businesses will recover first and which companies will win big on the back of the current turmoil. We will leave that to traders and speculators. As this crisis is now likely to match or even surpass the 2008 credit crunch we believe that the prudent thing to do is to focus on survival when picking assets and stocks.

The government bond portion of our Asset Allocation has been doing its job drifting up in value, providing some needed cushion as the equity markets sold off. However, we are not likely to rebalance out of these positions yet. It is very likely that there will be more pain to come for equities especially in the UK and the US, which are 2 to 3 weeks behind the likes of Italy and Spain. A complete economy lockdown in major European economies and the US will have deep and long-lasting repercussions for most risk asset classes. We would like to see fiscal measures announced weeks ago to start feeding through to the real economy before committing any more funds to equities.

On the direct stocks side of your portfolios, we will be focusing on holding strong stocks with “fortress” balance sheets, with little to no debt, low working capital requirements, and strong cash flows. This means we might be replacing some stocks, which we deemed attractive pre-COVID 19 with new positions in businesses characterised by more defensive traits mentioned above, and which may have become more attractive on valuation as a result of panic selling during the recent market drawdown.

Artur Baluszynski
Executive Director, Head of Research
Henderson Rowe