The Virus, Economic Impact, Policy Response and Intralink Approach
24 Mar 2020
We understand how unsettling times have become from both a health and financial perspective. There has been conflicting and rapidly changing information and there has been no source of reliable information.
In these trying circumstances, we are trying to keep you informed, as best we can:
The Virus Response
The basic strategy of most governments is to slow the spread of the virus, so that not too many people get it at the same time. This is to ensure that the medical resources of the county are not overburdened. This is a numbers game and we reduce the spread of the virus by reducing the opportunities to pass it on. The virus will naturally drop off as more people have had the virus and become immune. For the majority of people, the virus is a relatively mild condition and this is one reason for keeping schools open, as long as the kids do not visit higher risk individuals (which they shouldn’t anyway). The idea is to keep the rate of new infections low enough, so hospitals can handle it until better treatments come along or a vaccine is produced.
The Economic Cost
The government must weigh up the health risk against the economic implications of their actions. So far governments have clearly prioritised the health issue. No one wants to become the next Italy. As a result, they have caused unheard of disruption to the economy.
When people contemplate the magnitude of the job losses, business failures and the impact on the financial system and the economy they panic. How can huge parts of the economy stop without disastrous consequences? They are almost certain to be correct if there is no policy response. It would be a financial disaster that would impact on everyone. Anyone alive today would probably talk pre and post CoV19.
However, the certain disaster from lack of action, makes the policy response almost certain and the magnitude of the response unheard of. You also get global co-ordination, as we are all in this together. Central Banks, Governments and commercial banks all working together have enormous power. Initially investors panic because they just see the economic implications, but not the policy response. The policy response comes in and is often not enough at first as the numbers seem so big and markets get disappointed and fall, but when it gets urgent, the bazooka comes.
The markets, in that they represent the economy, always get what they want eventually. Anyone who went to cash during the GFC, greatly underestimated the power of policy makers working together. They have learnt from previous experience and should never repeat the policy mistakes of the 1930’s when they had far less understanding of how to manage an economic crisis and nowhere near the sophistication, levers to pull and tools to use than they have today. Investors that tried to cash out to avoid the uncertainty, almost never got back in at a price that was not well above where they sold (even if they sold well before the market bottom).
We will be see and experience some unbelievable distress in the upcoming period, but policy makers have no choice other than providing the support necessary to keep businesses alive and help those that lose jobs get buy until the crisis passes.
At Intralink we describe our investment process as “Positioning not Predicting” and there has never been a better example why. We have webinars on our website about our process and if you are stuck at home, maybe now is the chance to have a look.
We were underweight growth going into the falls, as we had been taking profits and were not comfortable buying at the higher prices of the previous six months.
Our focus on appropriate asset allocations has limited the damage from this extreme event.
We have benefited from having US assets and $US exposure. As a result, over the financial year, portfolios have held up very well.
Our focus on quality, in particular strong companies, with plenty of cash and low debt is all about protecting client portfolios from the unknown, as these companies can ride out the tough times. If there has ever been a better example of why we have a strong focus on risk and position portfolios to allow for the unpredictable, this is it. This crisis is at the extremes of even our very wide boundaries.
While no one enjoys times like these and we look forward to better times, we are pleased that portfolios have held up much better (by a large margin) than external portfolios with similar risk profiles.
Share prices have already fallen faster than we have ever seen as the magnitude of the health and economic problem escalated, but now is the time of the policy response. If you feel you have to sell now, that can be discussed, but if you think you will get back in at a lower price, we doubt it.
Please don't hesitate to ring and speak to an adviser if you have any additional questions.