March 4, 2020
Markets are focused on COVID-19
Stock markets around the world have declined sharply as investors have become increasingly anxious about the COVID-19 virus. While there is no doubt a significant human toll, investors are focused on the economic impact. Efforts to contain the virus are
significantly slowing economic activity and raising investor concern that this could lead to a global recession. While the possibility of a global recession has increased, the most likely outcome is that this will be avoided. In the meantime, markets
will remain volatile until we get better news.
The outlook was improving
Global growth fundamentals were improving prior to the recent escalation of the virus. Supportive central banks, low bond yields and a strong job market are underpinning signs that economic growth was stabilizing and likely improving. This was supporting
everything from stocks to corporate bonds to private equity. In fact, most equity markets were reaching all-time highs in mid-February. Since then the outlook for the global economy has become less certain and investor sentiment reflects this uncertainty.
When sentiment falls precipitously as a result of a shock it can cause a recession. This type of recession is not that common. However, the spread of COVID-19 is resulting in less supply and less demand for goods and services at the same time. For example,
people stop travelling, companies shut factories and consumption is put on hold.
The more common cause of a recession is when interest rates are too high, which causes economic activity to contract. As previously mentioned, today we are experiencing the opposite – rates are low and central banks are further reducing interest
Low interest rates are a powerful stabilizer of the global economy. Many central banks have said that they will lower interest rates further and are ready with other forms of stimulus if needed. Governments have also suggested supportive fiscal policy
measures. Lower rates and fiscal stimulus will serve to counteract the negative sentiment mentioned earlier.
Forest for the trees
Concern over COVID-19 is valid. As with many previous sentiment-driven markets, however, effects are likely to be short lived. The current period of reduced economic activity will be followed by a period of outsized recovery as people catch up on delayed
consumption. Markets tend to be unduly focused on what lies directly ahead (reduced activity) and lose sight of what comes after (recovery). The global economy is resilient, and powerful countervailing forces are at work. Recent market declines are
normal when there are unanticipated shocks like COVID-19. These declines also create opportunity.
Our investment teams have been busy on your behalf reassessing positioning as they analyze risk and opportunity. Equity strategies have had a focus on quality companies, with strong balance sheets and cash flow. This has protected capital in this period
of volatility. We have taken advantage of the market decline by selectively buying cyclical companies that our analysis suggests have been oversold, while adding more defensive stocks in the utilities sector and companies with exposure to gold.
Our asset allocation between stocks and bonds is neutral. We are using the recent pullback to add to global small cap equity markets, which we feel offer excellent long-term growth potential once the short-term impact of the virus subsides.
In times of uncertainty you can trust that we will stick to our investment process and make research based decisions about risks and opportunities. Our firm has navigated many periods of uncertainty over almost four decades. Inevitably, market volatility
creates opportunities and this time is no different. Short-term uncertainty can be uncomfortable. It is precisely at these times that investors who maintain a long-term view, balancing risk with opportunity, can position themselves to be rewarded.
From the desk of Jeff Guise, Managing Director, Chief Investment Officer, CC&L Private Capital.