What questions are being asked of investment managers during Covid19?
26 March 2020
Yogi Dewan, formerly at Goldman Sachs but now running a significant family office and their private investments tells, Karen Jones, what his clients, who all have c£30million+ invested with him, are asking about Coronavirus and what it means for their investments.
Yogi Dewan, Hassium Asset Management
"The obvious questions are short term about Coronavirus and clients want to know: when it will end and about testing, drugs and the vaccine. Once we get through this conversation, the investment questions are:
- How does this compare with previous cycles?
- Is the central bank and government response enough?
- What is required to stabilise markets?
- Is this now a 'structural' bear market? (This means a bear market (20% decline), caused by financial bubbles and imbalances. Cyclical bear markets are different and a function of economic cycles. This bear market is specific from the Coronavirus event. So like the oil or emerging market crisis. Structural bear markets decline by 50-55%. Cyclical c30%)
- Valuations are low but can we trust this signal?
- Will this all lead to inflation longer term?
- What is the impact on employment and earnings?
- What is priced in and when can we expect to see things improve?
Despite this, my clients, investors are remarkably calm compared to previous market sells offs over the last twenty five years."
He says in response
News flow on the spread of coronavirus in Europe and the US will get worse further in coming weeks. The impact of Coronavirus will lead to a severe Q2 recession, but we expect a pick up in the second half of this year into 2021. We are expecting a quick market recovery once the spread is under control, though the economic recovery will clearly take longer.
Asia has shown how social distancing works and in China very few new cases are being reported.
News flow from India, the world’s second most populated country will be important. Progress is being made towards virus testing, rather than drug therapy (6-12 months out) and vaccine development (12-18 months out). News on potential drugs and vaccines, whilst important longer term, will be of limited impact re the short term virus spread.
This bear market compared to others
The main difference is the sell off has been much faster, but the magnitude of the falls are in line with past event-driven bear markets.
Given the central bank and government fiscal plans announced we do not see the market impact as long term. However, if we see rising unemployment, corporate losses infecting the banking system, and a large-scale credit squeeze then the market could have further to fall (US unemployment figures went from 282k to 3.28mn in a week as of 26/03/2020). Previous structural bear markets have seen markets fall by 50% or more, down another 20-25% from current levels. Investors now need to see clear signs that the infection rate is reaching a peak and signs that the economic downturn is slowing. Whist there is some concern about inflation longer term, this is unlikely with investors staying long cash and corporations unwinding inventory.
Should we be selling or buying?
We have been cautious buyers. We have started buying China as the country reboots.
We have not been buying gold which seems to be acting more as a provider of short term liquidity rather than a traditional safe haven asset class.
We have reduced our USD exposure and see an overvalued US dollar trending lower.
In equities (stock market companies) we are positioned for a bear market with working from home considerations; food retailers, HPC, healthcare, TMT payments, cloud, energy names.
We have also taken profits in our longer dated bond exposure which means we sold 10 year debt at a profit and used to buy shorter dated bonds, which were better than cash. We will reverse this as prices change and can already see signs of this opportunity in the market.
Pension funds, which are a $6 trillion market (source Goldman Sachs research as of 24th March) lost approx. 25% in value due to the market sell off in the last month. However, at the end of each quarter they rebalance their portfolios and so will purchase 25%. So they are a natural buyer, supporting the market and a lot of buying is going on and the sums are massive. As an aside pension funds have a set investment pattern: 95-100% (of their money) in equities.
Hedge funds with leverage (debt) are also rebalancing.