Equity markets have been rocked by the rapid spreading of coronavirus disease 2019 (Covid-19) worldwide, with the daily infection rate increase now trending around 33%.
The emergence of a price war in the oil market – after Russia refused to agree to production cuts proposed by Saudi Arabia – sent markets into free-fall and volatility spiking to levels not seen since the eurozone debt crisis in 2011. The pick up in sentiment on the back of stimulus plans by the US government did offer momentary solace, but this was short-lived.
Governments around the world have enforced stricter containment measures and markets were sent tumbling once again as the US suspended travel from Europe, while the World Health Organisation finally declared the coronavirus outbreak a pandemic.
Amid this turmoil, as portfolio managers, we believe it is critical to remain focused on the quality characteristics of any business we assess. We would urge long-term investors to note the underlying strength of the businesses in which we invest and the inherent growth these businesses should deliver, and strive to overcome any short-term negative sentiment that may result from the current market environment.
Diversification, active asset allocation and disciplined portfolio construction are important tools in managing downside risk. While not immune to the market sell-off, our portfolios have demonstrated their relative resilience, with smaller drawdowns than the market in the short term.
It is difficult to draw meaningful conclusions over such short time periods, particularly given the rapidly changing situation. While medical professionals continue to model increased incidences of coronavirus infections and mortalities worldwide, the reality is that nobody knows how this will evolve. Extreme predictions will likely carry on receiving more airtime in the short term.
We continue to believe that there won’t be a classic V-shaped recovery.
We believe the correct forecasting of complex global macro outcomes is almost impossible. Rather, we maintain a balance of exposures that offer protection against a range of potential outcomes. Our preference is for high-quality global companies that have enduring competitive advantages, with strong and reliable cash generation, healthy balance sheets and lower cyclicality than the market.
Locally, we prefer government bonds as they provide a natural hedge against the volatility of the rand and bring stability to the portfolios.
We have been quite bearish on the outlook for local equities and property for some time.
While valuations are more attractive than they have been for some time, the prospects for many ‘SA Inc’ businesses (firms that are highly sensitive to the South African economy) are still dependent on economic recovery.
Based on our scenario analysis, the range of future expectations is quite wide and thus we have low conviction in our ability to call the bottom. It is therefore important to be selective and disciplined around security selection on local growth assets.
We have a relatively large cash holding, which gives us the flexibility to remain disciplined and only deploy capital when attractive investment opportunities become available. We remain unwavering in our commitment to growing our clients’ capital in a judicious and discriminate manner.
Clyde Rossouw is co-head of quality at Ninety One and manager of the Ninety One Opportunity Fund.
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