Perspectives April - Investing is like a marathon
We are certainly living in uncertain, if not unprecedented times. But when it comes to markets and investing, we are in a marathon, not a sprint. During periods of market turbulence and dislocation, portfolio diversification is especially critical in absorbing volatility spikes. The first quarter of 2020 saw the greatest decline in global equities since the 2008 financial crisis. But while we have seen capitulation in some markets (price-to-book ratios are back to 2008 levels in Asia, including Japan), globally valuations are still well above the troughs touched during the global financial crisis (GFC). While comparisons are always difficult to make, there is room for asset prices to fall further. We remain conservative in our positioning, staying underweight equities. On the fixed income side, we emphasise quality more than ever, preferring asset-backed versus cashflow-backed debt securities.
On the bright side, banks are better capitalised today and not as extensively leveraged as before the GFC. But they are still exposed to the great challenges now facing their corporate and retail clients due to virus-induced recession. Banks can provide the channel for the Federal Reserve’s support measures to reach companies and individuals.
The key government-stimulus target today is to protect consumers so that as many as possible can be carried into the recovery when it arrives. This will limit damage to companies hit by the loss of consumer purchasing power. Corporate margins will suffer. Some companies will go bankrupt and unemployment will rise. This will slow down the recovery, requiring an even stronger fiscal response. Government regulation is set to increase, and we are already seeing pressure on companies to reduce dividend payouts. We could also see a fundamental shift in the economic paradigm away from an emphasis on profitability and towards one that favours labour.
Crises tend to expose and penalise the weakest links most severely. At a country level, we favour those with the fiscal and legislative strength to deliver adequate fiscal stimulus —the US, Germany and China. We also prefer exposure to those taking the appropriate measures to contain the coronavirus. Longer term, we are focused on distinguishing the winners from the losers in the wake of this crisis. We expect a number of equity sectors to fare well, including healthcare and internet. Infrastructure could also benefit from increased fiscal spending. As profitability declines, we can expect a rise in M&A, which could provide fertile hunting grounds for cash-rich private equity funds. We continue to favour private equity, which is also less sensitive to the current fire selling taking place in public markets.
In times like these, we must avoid looking back and focus on looking forward. More than ever, it is important to realise the benefits of remaining invested in difficult times. Now is an apt time for investors to review their risk-return profiles and ensure that they are appropriate for the prolonged period of heightened volatility we can expect ahead. Investors should consider how the future investment landscape will change and whether their investments can weather that journey and any further unexpected near-term events. Remember that ahead of the dot-com bubble bursting in 2000, the business ideas favoured by markets then have since become reality, but the winners have been those companies that could survive through time. We are focused on quality, low-leveraged companies, ones that avoid excessive regulation and that are best positioned to be self-sustaining through times of turbulence — the owners of their own destinies.