What do we think? What are we doing?
Another year, another crisis it would seem.
Lately, world attention has been focussed on Coronavirus and the speculation, fearmongering - even the odd fact - about how bad it is and how bad it could be. If you don’t know already, “Corona” means crown in Spanish, and Coronavirus is a category of viruses so named because of its appearance -- it’s covered with crown-like spikes.
The rapid spread of Coronavirus has forced investors like Pie Funds to address a number of questions which are almost impossible to answer. The outbreak certainly has the potential to have a significant economic and market impact. However, the scale of this is impossible to predict until we know more about how the virus spreads and evolves and the economic impact of the response.
Understandably, clients and investors have asked us what we think about its market impact and how we’re preparing for it.
From an investment perspective, we’ve been monitoring the situation closely while simultaneously looking back at past outbreaks and their market consequences; and thinking about how the markets now are different from markets in those situations. So it’s how businesses, consumers and governments respond to the virus which will have an impact on economies and markets. A number of factors have informed our plan:
Whilst no two viruses are the same, history shows markets are resilient to outbreaks including SARS, Asian bird flu and Ebola. Even just a month has often been long enough for markets to recover from outbreak-sourced shocks, as the economic effects are temporary;
China’s economy is now a much more important player in the global economy than it was in 2003 when SARS occurred. However, if the crisis deepens in China, legislators there have the stimulus tap at their disposal and are clearly prepared to give it a solid twist;
Central governments more broadly are, of course, involved in their own scenario-planning exercises. A response to closing borders and economic slowdown could be further cutting of interest rates. Which, as we know, could even be positive for equities already benefitting from the ‘There Is No Alternative’ tailwind. But;
Given we are a decade into a bull market, the potential for the virus to trigger a market correction is greater than previous instances.
Taking those factors into account, our response plan involves three scenarios with varying probabilities of occurring. The first, and most likely, is a brief painful period followed by recovery – the ‘one quarter of poor sales’ scenario.The second, is a sustained period of ongoing uncertainty and rampant, largely uninformed speculation again ending with recovery. The final, and least likely, is a genuine global crisis centred on a pandemic with deep, wide and lasting economic consequences.
Determining which scenario is occurring, or is imminent, is the critical part of our plan. We’re watching the spread of Coronavirus within and outside China; political and economic reactions to the disease – such as tourism and other restrictions; and market factors which could have an offsetting positive impact, or a compounding negative one. All of these can jointly and separately affect single companies, entire industries and ultimately global markets.Meanwhile, the Pie funds have moderate cash levels – low relative to Pie’s recent history but still quite high relative to the industry – which represents some buffer against market shocks. Each fund also has market hedging in place, higher weights in the international funds, to help protect the value of our investments should stocks fall.We prefer hedging at this stage rather than forced selling as a better tactical precaution because this could be resolved relatively quickly. Selling stocks into each potential market wobble has proven (time and again) not to be the best strategy for long-term investing. Once sold, companies can be hard to buy back when the market starts to recover. Especially smaller companies.
Hopefully this shows we’re taking the situation seriously and have thought hard about what to do. We’ll keep you informed about our view of the Coronavirus situation and updated on our response.So a little bit like a safety briefing on a plane, there are risks, they could be catastrophic, but most likely they won’t be, and this will pass.
On a happier note, I’m looking forward to seeing as many of you as possible at our nationwide series of Investor Days. We’ll be in your city or one near you, shortly. I’m going to all venues so please check out all the details at the end of this newsletter and come along.
As always, thank you for your support. If you have any questions please don’t hesitate to call me on (09) 486 1701, or email me, [email protected]