This week has brought incredible single day moves in financial markets — the largest in a couple of years. The chief culprit is the coronavirus. Many portfolios were offsides and were not positioned for the occurrence of an epidemic. The virus itself, infection rates, number of infected, comparisons to the flu and, unfortunately, death rates aren’t the central issue leading investors to revalue financial assets. In our opinion, what matters to markets is that future economic growth will be impacted by quarantines and travel bans. As a result, growth fears are again a focus and uncertainty has increased.
As we know, uncertainty leads to indecision, indecision leads to less activity, less activity leads to less growth. It is a non-virtuous circle. At present, many companies are pulling or reducing guidance (the airlines and travel related sectors are the clear case studies). Our email inboxes are filled with coronavirus notes and analysis. The cadence of headlines and research feels like a climax in focus and vigor; however, we cannot predict the future – we can only prepare for it. We do note that there have been a number of epidemics over the years and, over time, markets recover.
While the overall rate of new confirmed cases is slowing, flight to safety assets such as gold and rates are rallying while risk assets such as equities and commodities are falling. Generally, it is difficult to be bullish in this environment. On the other hand, history has imparted on us that conditions evolve and often pass. We believe that, as and when containment occurs or a vaccination is identified, pent up economic demand will gradually be released. While we cannot predict timing, we think that when this demand is released it will further extend the modest growth patterns the economy has been experiencing over the past years. It is our opinion that this set up will be supportive of certain financial assets including credit.
Looking ahead from an investment perspective, we are monitoring virus headlines and are critically focused on the potential second and third derivative impacts that might bleed into other companies and sectors. We continue to be positioned for a moderate growth economy and plan to add modestly to certain positions during dips and use rallies to reduce other exposures where appropriate. Overall, we do not want to panic as even though there are challenges, we believe the current environment will also produce investment opportunities. That said, we continue to believe that credit can perform in volatile, low growth and even slightly recessionary environments.