Robert Swift, portfolio manager of the TAMIM Global High Conviction strategy, continues to consider what has been happening around the world these past few weeks. Is it a time to panic or simply remain calm?
We are trying to remain calm ourselves, let alone reassure our investors. However we think that years of experience will enable us to navigate this financial, economic, and social shock. We have been inundated with opinions on what to do and what happens next and so can imagine adding to them with a lengthy article is likely to end up in the ‘delete’ folder immediately. Consequently as briefly as we can be here is what we believe and are recommending.
We believe the short term is unknowable, despite a lot of articles claiming that X or Y will happen, BUT we do know that people recover from this virus; that QE is coming (again) to reduce unnecessary insolvencies, and that the economy will grow again at some point – so we do know there IS a long term; you should focus on this.
There has been no hiding place in risk assets – Value, Growth, Technology, Utilities – all have been whacked about the same, as investors have again gone to the equity market ATM to raise cash and have not discriminated. We were defensively positioned; believed it would be a smaller correction to the benefit of what we owned; but we have been hit and it is scant consolation we have outperformed our benchmark by 4% month to date. See the chart below which compares the S&P 500, NASDAQ and Global Utilities.
Cash and long duration govt bonds have been good places to be. As have the currencies of Net Creditor nations such as Japan; the Yen has appreciated considerably. Therefore please stay diversified across numerous assets at all times and please appreciate that Australian bank share prices are closely correlated with Australian house prices and employment levels (ie NOT very diversifying for most Australian investors) We also repeat that Japan’s debt is large but owed to themselves; meanwhile they own a lot of other country’s debt as assets. Australia owes money to the rest of the world and the A$ is consequently a weak currency in a crisis. You probably need more outside the A$.
See the chart below which shows the AUD$ vs Japanese Yen over the last month.
Hold that thought on long duration assets because that is what equities are too, albeit with no guaranteed redemption date or price.
So, we have completely lost maybe six months of earnings but with interest rates very low, what is the present value impact on a long duration asset such as equities whose real value lies far in the future – certainly more than six months away? It’s minimal. Given that we are likely to see plentiful liquidity offered by central banks, there should be no shortage of cash to cover the shortage of cash flow. This market is all about sentiment on long duration assets and while of course some companies will be permanently impaired and not all of these will receive a bailout, most companies will survive.
We know from experience that the equity market tends to inflict maximum pain on the maximum number of people. You’re in when you should be out and vice versa. Maximum pain this time would be a V shaped bounce which would be ‘inconvenient’ since we all want time to carefully consider the winners and losers post the impact of the virus. This may be time we don’t get, and we shouldn’t look to finesse our re-entry? It would be most painful to miss an opportunity to buy risk 30% lower than where we were, even if we don’t quite get the exact day to do so?
Therefore, we should consider whether it is possible to get a V shaped recovery in markets and the economy? Looking at the Hong Kong SARS experience in 2003 the answer is YES. There is a precedent for a rapid recovery from a virus which has clearly worked its way through and peaked. Certainly it’s possible for the markets which are a discounting mechanism and tend to move before the increase in economic activity is evident.
Consequently our stance is to recommend that investors stay diversified but INCREASE equity risk toward the following equity assets:-
We continue to hold overweight exposure to Japan and Asia and also in utility stocks currently although we do not expect their recovery to be V shaped!
Markets & Commentary
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TAMIM Asset Management provides general information to help you understand our investment approach. Any financial information we provide is not advice, has not considered your personal circumstances and may not be suitable for you.