Weekly View - 3 points
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. Analysing events as they unfold and reviewing the consequences is crucial. During periods of market turbulence and dislocation, portfolio diversification is especially critical in absorbing volatility spikes. Market valuations like price-to-book ratios are still well above Great Financial Crisis bottom levels. 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.
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 are overweight 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. 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 events that could impact near and mid-term performance. It is helpful to 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 that are best positioned to be self-sustaining through times of turbulence - the owners of their own destinies.