At the end of last week, we experienced the second worst day in the FTSE 100’s history. The UK's Financial Conduct Authority banned short selling on 85 stocks for the entirety of Friday 13 March. Other nations have initiated similar policies, with Spain prohibiting shorting 69 stocks that fell more than 10%, having experienced its worst ever single-day loss of 14.06% in a day, and Italy also imposing a ban.
The reasons for the declines experienced in the stock markets are well publicised. Having two macroeconomic events taking place simultaneously is almost unprecedented - the Coronavirus (Covid-19), and in addition, the fall out between Russia and Saudi Arabia at the recent OPEC meeting.
When it comes to the Coronavirus (Covid-19), we can refer back to history, with the likes of SARS of 2003, the Hong Kong flu of 1968/1969, and the Spanish Flu of 1918 to 1920. The Hong Kong flu of 1968/1969 was a mild pandemic, and history tells us that global economic growth fell by 0.7%. Whereas, a severe pandemic like the Spanish Flu of 1918 to 1920 would slash global economic growth by 4.8%, which did result into a global recession. Currently, we are not sure as to where the Coronavirus (Covid-19) is going to take us, and this uncertainty has caused the global stock markets to decline to the extent we have experienced.
Nevertheless, the majority of governments have introduced financial packages of stimulus and central bank interest rate cuts to assist their economies during this period of economic difficulty and uncertainty. Such assistance will continue and increase. Where we need to look is towards China, the world's second largest economy, to see what type and extent of financial stimulus they introduce, and if large, this could produce a "V" shaped recovery of the global stock markets. An "U" shaped recovery would also be welcomed, but the "L" shaped recovery would not be welcome.
So What Are Investment Managers Now Doing
Over the last fortnight, we have canvassed all of our investment management partners to gauge their opinion and ask their thoughts of the potential outcome in the near future. With all, they are prioritising the re-balancing of investment portfolios by selling bonds and buying equities to return to the target weightings within funds and portfolios. When buying equities, their focus is on purchasing equities that are "mega-caps" with the strongest balance sheets. They also have added to oil stock holdings, as oil share prices are lower now than in 2015 when Brent Crude was $25 per barrel.
All of our investment management partners have stated that if stocks continue to fall, they will increase the allocation to equities further, focusing on the above. On the second or third legs of market falls, they would start adding to the more cyclical and smaller companies in the portfolios.
All have been waiting for a correction for two to three years, so they have now started "funnelling" this cash into equities to take advantage of the lower price valuations in the stock markets.
All of our investment management partners are aware of the nervousness, especially when we have not seen anything like this for more than a decade (2008). However, it is worth remembering from the late 80s to the 2000's, corrections like these were unfortunately quite common. For example, 1987 was by far the worst, and the strong companies survived and flourish afterwards.
The following statements are a "snapshot" of what our investment management partners have said in recent days concerning their portfolios and current practice in these difficult times:
TAM Asset Management: Very short-term losses of a material amount are inevitable and, even though we are known as a conservative manager of money, we have had some short-term pain and falls in the value of client accounts. However, we did sell out some equity positions early in the crisis and have both UK and US Fixed Interest in most portfolios that are performing well.
We have listed some highlights of the above numbers against the FTSE All-Share down 25% over 12 months to 14/3/2020 (bearing in mind that this is a daily moveable feast as a result of the volatility):
Defensive and Cautious accounts have broadly lost no money,
Balanced accounts are down approximately 5-6%,
Ethical accounts from Defensive through Adventurous are down no more than 2-3%.
These figures will fluctuate based on daily market movements of course, but TAM is strongly positioned to take advantage of the extraordinarily weak pricing as the volatility unfolds.
Rathbones Investment Management: We feel comfortable with our positioning at present, taking into account the spike in volatility we have seen. It is always uncomfortable buying at times like this, but we must remain disciplined. We buy companies with a five to 10-year view. We are very confident that we are adding to world class businesses that will produce excellent returns if we are patient.
Despite the carnage, there are some brighter spots. Stocks such as Clorox and CME have held up pretty well. Detergents and derivatives exchanges seem to be safe havens. However, broadly we are focusing on adding to portfolios through ETF’s, FTSE100 stock, and principally S&P500.
The Equity component in our portfolios is made up of businesses with strong economic moats, strong balance sheets, high free cash flow yields, high returns on invested capital and good access to capital. We have very little exposure to companies with high levels of debt, almost no corporate bonds, and no high yield. Typically, the strong companies survive and indeed tend to flourish afterwards. It is this fact that drives our approach for the coming period.
Brooks MacDonald: When we look through to relative valuations based on measures such as earnings yields, equities appear very attractive unless you are predicting very negative long-term consequences on the back of recent events. We are not in that camp, so, we will be looking for opportunities to present themselves so that we can maximise the recovery of value in portfolios when sentiment begins to turn more positive.
In addition to the above and following our asset allocation meeting yesterday, I can confirm that the committee has decided to reduce our UK Fixed Interest weighting in favour of an increase to our total equity weighting. Once volatility calms, global asset allocators will need to deploy capital somewhere and the differential increases the probability that marginal funds will flow into equities.
The clear message from all is that investors should not panic, and it is a matter of being patient, knowing that a market recovery will happen. From our own experience over the last two weeks, we have been inundated with client requesting to add further capital to their portfolios in order to take advantage of the depressed price values. Where the bottom of this market values are, is the "million dollar question". However, we are confident that investment commitment at some point within the next eight or so weeks, will be proven to be profitable in the medium to long term.
As always, if you would like to discuss your financial position, please contact us. However, during this difficult time, we ask that you remain safe, and follow the strategic "National Plan" that Portugal has implemented.