Coronavirus: an investment update

The COVID-19, as caused by coronavirus, is proving to be a phenomenon that is difficult to understand in almost every way. You will have no doubt heard that it’s a mild illness for some, that only 1% of people will die…but also that it’s going to overwhelm health services, cripple economic growth and end the equity market bull-run. Some of these things may prove to be true, but they also may not. It’s essential to keep in mind that we can only ‘know’ these things while assigning a given level of probability to each. Of course, that they may also not be true means that they might be ‘wrong’ – a little or a lot.

What we do know is that this is an unprecedented set of circumstances, which means that the ability of anyone to make reasonably accurate forecasts about the disease and its repercussions with any degree of confidence, beyond the immediate future, is extremely limited.

At the same time, the nature of the outbreak is such that the more pessimistic forecasts – based on the uncontained spread of the disease – involve exponential transmissions to new patients. The problem in understanding the impact of something with exponential growth is that any error in the assumptions used can cause enormous differences in outcomes. In addition, we can also anticipate that disruptions of everything from medical supplies to consumer demand to supply chains will cause a feedback effect, further distorting forecasts and creating a vicious circle.

Other unexpected things can and will happen. For example, Saudi Arabia’s recent decision to discount crude prices and raise production in the face of Russia’s reticence to reduce production to maintain prices with the rest of the “OPEC+”. Events like this can further shake confidence and cause traders to sell even more when there simply aren’t as many buyers around – when assets that previously appeared to be liquid suddenly have fewer buyers, it causes volatility in markets that is itself making headlines.

So there are two types of unknowns. The first is the virus and its interaction with our global community, and the second is how that global community responds. It is possible that a coordinated fiscal and policy response from global governments could prove effective – creating a virtuous circle.

So, given a difficult mix of unreliable forecasts and no reliable model on which to base our expectations, what action should we take?

The main response is to stay focused on our investment process, because it is designed to weather such storms, and we continue to believe it is working. We are valuation-focussed investors, guided by the principle that the price paid is an important determinant of future returns.

Our own investment research had shown the valuation of stocks had been inflated for some time and well before the impact of coronavirus was felt. Our portfolios entered this crisis with a lower than usual allocation to stocks. It may be that we see prices drop enough to justify expectations of above average returns ahead, and which may then lead us to increase our stock allocations. Meanwhile, as well as a higher-than-normal cash position, we also have highly-liquid fixed income positions in the portfolio, which we could use to fund increased allocations.

Equally, however, we may not, since our portfolios are based on the ever-changing balance of probabilities. As information changes, we also reassess our plans with the perspective we bring as experienced and professional investors and the confidence that our strategic asset allocation gives us the breathing room to make considered decisions that deliver returns over the long term.

We remain confident that our strategy is robust, that our clients’ assets are safe and invested in liquid highly-regulated and transparent investments. We are also committed to protecting clients’ capital and that we believe each is taking an appropriate level of risk given the wide range of risks, and opportunities, that are out there.