As published on spearswms.com, Friday 20 March, 2020.
Rapid, global and deadly. While the full impact of coronavirus has yet to be felt in its entirety, the reality is already upon us: our countries are in lockdown, travel has been banned and financial markets have gone into free fall.
It also appears certain that a global recession is no longer avoidable. Growth in the UK economy this year could fall to just 0.6 per cent, according to the Treasury, while Capital Economics has said it might contract overall by 1 per cent. Forecasters predict worldwide growth will be more than halved to 1.25 per cent – that from Goldman Sachs. Already the FTSE 100 has fallen to levels last seen in 2009 and the FTSE 250 has lost 40 per cent of its value since 20 February. The pound, meanwhile, has reached lows against the dollar not seen since 1987 as investors turn their backs on sterling.
‘Never in peacetime have we faced an economic fight like this one,’ the chancellor Rishi Sunak said earlier this week as he unveiled a £330 billion package of financial measures to protect the UK economy against the impact of the virus.
For those invested most heavily in financial markets and the wealth managers who advise them, this state of affairs has created the most precarious terrain they have had to navigate since 2008.
‘No one knows how long this pandemic will last or what the long term ramifications of it may be,’ says Josh Matthews, co-founder and managing partner of MASECO Private Wealth who is enacting a rebalancing programme with clients to ensure that their portfolios align with their individual circumstances. ‘It is imperative to stay diversified into investments that are not highly correlated.’
Matthews expects local currency bonds to ‘maintain their value’, while managed futures trade in a ‘non-correlated’ manner. Alternative credit – which has exposure to esoteric and uncorrelated investments, such as divorce funding – will continue to perform as expected, he tells Spear’s.
‘When the market starts to feel more confident about the future, we would expect uncertainty and volatility to subside and then equities should start to push higher,’ he adds.
Similarly Charlie Hoffman, managing director of private banking at HSBC UK, reports the bank’s clients are ‘concerned’ about the short-term impact of the virus on their investments.
‘Clients are concerned about how long markets will remain volatile and depressed, although at present there is a consensus that the shock to markets is short as opposed to long-term,’ he tells Spear’s.
Moreover, those HNWs who are ‘sitting largely on cash waiting for a correction’, he added, are worried at ‘what entry points they should consider averaging into markets’. But, he said, ‘many have a very diversified investment strategy which helps manage the volatility in their portfolio’.
The private bank’s chief market strategist Jonathan Sparks says that while central banks have reacted quickly to the crisis by cutting rates and providing liquidity, we will ‘probably continue to have elevated levels of volatility until the virus spreads more slowly’.
Noting that portfolios are focusing on ‘resilience’, with a preference for quality companies and ‘refraining’ from too much risk, Sparks adds: ‘For clients that are willing to weather the current volatility some of our investment themes, where the structural changes in technology, changing demographics, or sustainability, look more attractive.’
Jason Hollands, managing director at investment giant Tilney tells Spear’s that one of the key messages the firm is communicating to clients is ‘not to try and trade heavily in these markets and to avoid panic selling’.
‘While stock markets are down significantly as markets have moved to price in a recession, the day to day volatility is extreme,’ he says.
The view of the firm, which has around £25 billion of assets for UK private clients, ‘isn’t to try and take short term views but to stay focused on the time horizon relevant to clients, which is typically longer-term’.
Hollands added that ‘locking in losses’ by selling investments at distressed levels ‘just doesn’t make sense’.
‘Coronavirus is undoubtedly a major economic shock, with significant short term ramifications for markets, but this period will ultimately be transitory, and it is vital clients participate in the recovery phase and don’t bail out at the point of maximum stress,’ he notes. ‘We are therefore reminding clients to hold their nerves and to keep investing.’
Hollands harkens to the 2008 crisis and the dotcom bubble as cases in point for why it’s a bad idea to cash out. ‘That’s the benefit of calmly looking back in hindsight rather than making decisions when the sky appears to be falling in,’ he adds. ‘Our job is to put the emotion to one side and focus on the opportunities this dislocation is creating.’
At Close Brothers Asset Management, Andrew Mackintosh-Walker, a managing director at the firm, says that while clients take a long term view and account for markets that can occasionally fall significantly, ‘portfolios can be flexed’ as the situation evolves.
‘We’re reminding our clients that this is where active management comes to the fore,’ he tells Spear’s, noting that investment managers at the firm are reviewing existing stock holdings in terms of their quality, resilience, and debt levels. Now is the time for clients to ‘look for opportunities’ in quality businesses that are priced more ‘attractively’ as markets slump.
‘Having trimmed exposures to areas which we expect to be most vulnerable, we stand ready to deploy cash once we believe the negative impact can be more accurately assessed,’ says Mackintosh-Walker. ‘Additionally, at times such as this, our investment bonds and alternative assets provide our clients with diversified portfolios.’
While markets are volatile as they are now, it is still possible to trade, says David Miller, investment director at Quilter Cheviot. ‘Sellers, and on some days, buyers might not like the price, but are not locked in,’ he says. ‘The business of investment might be difficult, but it continues to operate.’
Miller also notes problems emerging at the ‘higher end of the risk spectrum’, where those who assumed low volatility over an extended period would find themselves exposed. ‘This is where the margin calls are hitting home,’ he notes.
Miller expects that ‘all will be in place’ for the economic recovery to start when the infection rate in the US peaks. ‘Financial markets will judge the effectiveness of this plan and, as ever, will turn before the facts change,’ he adds.
‘Maintaining investment discipline based on valuation and reality seems to be the best way through the unprecedented series of events that have come upon us this year.’
At Dolfin, a wealth management platform based in Mayfair and Malta with £4 billion in AuM, the market upheavals of the last weeks have hit clients just as they have elsewhere.
‘Obviously everybody’s quite worried,’ says Georgios Ercan, head of sales. ‘At the same time everybody’s trying to make the most of this crisis and whatever’s going on in the markets.’ For now, the watchwords for his team are simple: ‘This is the time to be close to clients, to be speaking to them, to be giving them comfort, to support them.’
The wealth manager believes that as ‘a health and livelihood issue’ the Covid-19 outbreak is closer in impact to 9/11 than the 2008 credit crunch. ‘We have not seen panic selling from private clients,’ he notes. ‘That was the case in 2008.’ Indeed, from clients’ perspectives ‘it’s more their being prepared to hold on and ride the wave.’
Earlier in the week, Ercan says, some clients were looking for opportunities to ‘increase allocation into riskier assets’ but that was stymied by Chinese GDP figures which showed steeper falls in February than in October and November 2008.
For more than a month now Dolfin has been working on a new investment strategy to respond to Covid-19, according to its head of investment management, Simon Black. He notes that many of its clients are still ‘up to one to two per cent’ year on year thanks to the firm’s bearish position on equities going into 2020.
Like other investment managers spoken to by Spear’s, the firm is now looking at its now ‘deployment strategy’ focusing on three baskets of investments: ‘resilient’ firms – ‘where we’re going to see better revenue numbers from changing consumption patterns we’re seeing already’ such as Ocado. The second area of interest is what they’re calling internally, ‘ugly ducklings’ – ‘companies that are massively impacted by the coronavirus… hotels, tourism companies, airlines but with strong enough balance sheets that we think can survive’. And the third basket is the energy sector, which Black says is ‘similar to the ugly ducklings basket, in that it’s companies that are going to get beaten up by the markets but which have strong enough balance sheets to withstand the market downturn.’
Having identified the ‘what’, it’s now a question of timing, says Black, of when to reinvest. ‘What we’re saying to our clients is, you’re positioned well, wait and watch, and there’s no need to hurry into anything in the next week or two,’ he says. ‘Private clients have long term time horizons from an investment perspective. We are looking and waiting.’
And that’s the question confronting the market; how long to wait. In a briefing document, Charles Roberston, a leading emerging markets specialist at Renaissance Capital, advises investors should keep a close eye on Italy to see how the virus crisis plays out in Europe’s most Covid-19 struck economy. ‘We think proof the virus is being brought under control is needed before investors can begin to focus on the economic fall-out from the lockdowns,’ notes Robertson.
‘A slowdown in Italy’s cases might help – but US markets are unlikely to stabilise when active cases are rising by nearly 40 per cent a day. We think we need to see at least half that figure.’
He adds: ‘Once the virus is brought under control, we think markets can then turn their focus to the China PMI at the end of this month – will it show China pulling up from the crash in last month’s figure (we guess yes).’
For now, for investors and worried people everywhere, the end of the month seems a long way away. The key breakthrough will hopefully come in Italy over the coming days: coronavirus has a median incubation period of 5.1 days – albeit symptoms sometimes take up to 14 days to show – meaning that the benefits of Italy’s nationwide lockdown announced on 10 March, should be about to come to fruition. If come Tuesday Italy has started to escape the sort of exponential rises in new infections that we’ve been seeing there – then light maybe at the end of the tunnel. If that happens, then the markets – and people everywhere – will have grounds to celebrate.