Hold cash, position defensively: asset managers react to outbreak
Strategists from Morningstar, Vanguard, BlackRock, Investors Mutual and other firms weigh in.
The coronavirus--and its impact on global growth--has rocked stock markets worldwide this week. The broad-based S&P 500 has posted its quickest plunge in history. In six days it has fallen more than 10 per cent from its record high.
Australian shares are set for their worst week since the global financial crisis. The benchmark index has plunged about 10 per cent, wiping off about $240 billion in value, since the market hit a record high on 20 February.
The S&P/ASX200 index was down 203.6 points, or 3.06 per cent, at 6,454.3 at 1030am Sydney-time on Friday with all indices a sea of blazing red.
Given the ongoing market turbulence, we turned to some financial experts to find out what they're telling clients.
Morningstar Investment Management
Morningstar Investment Management (MIM) sent a note out to clients urging caution.
"With lives at stake, it would be uncaring to call the coronavirus ‘noise’. Yet, if we focus on the investor's perspective, we believe it is not time to act," they say.
"Moreover, we remain confident in our portfolio holdings because they reflect a solid base of research and resemble a well-reasoned way to invest. We certainly won’t be hitting the panic button and we hope you won’t either.
"Nonetheless, while it remains very difficult to predict the impact that the coronavirus will ultimately have, it is worth highlighting that share and bond markets, in general, are overvalued. This means that the risk of losing money is elevated and markets remain vulnerable to any bad news, whatever the cause. In this regard, our portfolios remain defensively positioned, holding more cash than we otherwise might."
MIM provided a chart of how investors tend to react to epidemics. It shows that the long-term picture is positive.
Source: Morningstar Global Markets GR USD Index, using Morningstar Direct data as at 31 December 2019. Morningstar Investment Management Insights – Coronavirus: An Investment Perspective
MIM says that as long-term, valuation-driven, fundamentally based investors, their concern is any potential impact to businesses' cash flows.
"For example, will the collective impact of the outbreak (fewer flights, less trade, loss of productivity, etc.) affect a few businesses, a few industries, or entire markets? That's the question we're asking."
At this stage, MIM is assuming the outbreak will take a similar path to other recent epidemics and are telling investors that there's no reason to be alarmed.
"Ultimately, we are very watchful but aren't taking any action. Our core ambition is to help investors reach their goals, which requires a measured and repeatable process to investing," they say.
"Across our portfolio range, we may hold exposure to Chinese stocks, emerging-markets stocks, emerging-markets debt, and companies that sell into China to varying degrees depending on the portfolio mandate. Even so, we are still expecting that these holdings will deliver positive outcomes over the long term, and it would require a clear impact to fundamentals for our view to change."
A 25 February post in Vanguard Perspectives addresses the uncertainty that the coronavirus has injected into the global economy: “While Vanguard has a global team of economists, lack of certainty about how far the coronavirus will spread makes economic projections particularly challenging.”
Specifically, Vanguard’s economists expect the coronavirus to slow 2020 global economic growth by about 0.15 percentage points, translating into roughly $135 billion in goods and services delayed or not produced. Three factors will drive the consequences this year, they note: how far the virus spreads and how long it lasts; how much fear inhibits travel, consumer spending, manufacturing, and trade; and what actions governments take to stop the spread of the virus and boost growth.
“The net effects won't become clear for at least several months," they conclude.
The upshot for investors? Remain focused on your long-term goals and be sure your portfolio is balanced across asset classes and diversified within them, in an appropriate combination for your risk tolerance.
Anton Tagliaferro, investment director at Investors Mutual Limited, on Friday detailed how the correction is affecting IML's portfolios.
"We are seeing a major correction occurring in all global equity markets as investors try to assess the impact of the coronavirus on corporate profits. The Dow Jones is now down over 12 per cent from the peak it reached on the 12th February as near panic grips many markets," he says.
"The extensive factory closures and travel bans that we are seeing in many parts of the world due to the coronavirus outbreak will no doubt have a real impact on global economic activity and this will in turn impact the profits of many companies."
"These types of markets, where uncertainty and fear are leading to many investors selling indiscriminately – while not that frequent – are nothing new. In these types of markets ‘the good the bad and the ugly’ all get sold down heavily as investors reduce their overall exposure to the equity market."
In times like these, Tagliaferro says there are a few things to bear in mind:
- The correction is happening at a time when many sharemarkets around the world had reached record highs on investor optimism of continued world growth, with many stocks arguably in over-valued territory.
- While the coronavirus is being taken very seriously by government authorities, so far the virus has led to around 3,000 deaths. To keep this in perspective, it is worth noting a 2017 World Health Organisation study attributed between 300,000 and 650,000 deaths per annum from the annual influenza virus.
Tagliaferro admits that IML's portfolios will be hurt by the current correction as all stocks get sold off heavily. However, he notes that IML's portfolios don’t hold any speculative companies, and have a good weighting to cash.
"Our portfolios are tilted towards companies which we believe are relatively immune to the consequences of the impact of the virus on economic activity – here we are talking about companies like Telstra, Coles, Ausnet and Sonic. Many of these stocks also offer attractive sustainable dividends," he says.
"While our portfolios own companies like Sky City, Crown Casinos and Events Entertainment which will all be directly impacted by the drop in tourism numbers, all these companies have proven business models and healthy balance sheets to help them ride out the current storm. Many of these companies also hold very valuable property assets."
"It is impossible to say exactly when the current volatility will settle down. However, when the sharemarket does recover, good quality companies with real businesses and sustainable earnings and dividends will again be well sought by investors and should recover well."
Morningstar’s Your Money Weekly
Morningstar's head of equity research Peter Warnes weighed in this morning, publishing in Your Money Weekly.
"The exit flight pattern is unlikely to be a regimented phalanx-like affair. Rather chaotic and unruly, reminiscent of a flock of sulphur-crested cockatoos," he says.
"When fear starts coursing through the veins of previously complacent passive investors, bedlam can follow. As the redemption phase from swollen exchange-traded funds (ETFs) is yet to be tested, when the fear of missing out (FOMO) turns to the fear of not getting out (FONGO), all bets are off."
Subscribers of Your Money Weekly will be all too familiar with Warne's concern around financial markets and a rising level of complacency. For some time, he has suggested caution and prudence. However, he says "markets have seemingly been oblivious to the potential risks and continued to make new peaks".
"Wall Street’s buzz phrase was “nothing matters” as equity prices surged to new highs and junk bonds in greater demand than triple As."
Warnes says some exposure to cybersecurity and a little gold and cash may be prudent in such times.
"The Australian-listed BetaShares Global Cybersecurity ETF (ASX: HACK) and US-listed narrow moat-rated Palo Alto Networks (NYS: PANW) and VMware Inc (NYS: VMW) are four-star Morningstar recommendations. A little gold and oil exposure plus cash may also be sensible," he says.
Mike Pyle, global chief investment strategist with BlackRock, published a 20 February post on the BlackRock blog detailing how the firm’s outlook has evolved since the coronavirus outbreak.
“We still expect the global growth to edge higher this year, even as the coronavirus outbreak has introduced uncertainties,” he says. “V-shaped recoveries in economic activities have often followed past epidemics--and we expect a repeat of this pattern. Yet the depth and width of the 'V' this time are highly uncertain. This outbreak could be more disruptive than past ones because it could be more severe, and because of greater reliance on global supply chains.”
Pyle notes that outbreak recoveries in the past have been driven by pent-up demand from consumers and a restart in manufacturing. But he also suggests that in the case of coronavirus, history may be an unreliable guide.
Here are some other insights on the topic:
- Janus Henderson: Markets Fear a Global Coronavirus Pandemic
- Nuveen: Coronavirus: Economic, Market and Portfolio Implications
- Capital Group: Coronavirus Rattles Markets: What's Next for Global Growth?
- T. Rowe Price: COVID-19 and Fixed Income Markets
- Matthews Asia: Coronavirus Q&A
- Wharton: Containing the Coronavirus--What’s the Risk to the Global Economy?
- Northern Trust: Coronavirus Update: Spread Outside China Is Raising Risks
- Sonders: Heartbreaker – Spreading Impact of Coronavirus