Covid hits hard in March

Our CIO Lance Peltz looks at what this all means for investments

Author: Lance Peltz

Posted on: 10 Mar 2020

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Confined to home, all of us are a facing a Tsunami of news and information about the virus. We don’t think we can add any insights about Covid-19, but would like to share some thoughts from the Cavendish Ware investment team about the investment implications.

 

Now we know that some form of social distancing and ‘lock down’ measures are likely to endure for at least 3 months in most countries, the inevitable recession will not be anything like a “normal” one. The fall in output and rise in unemployment will be sudden and vast. We have seen a huge central bank, regulatory and Government response. This response has ratcheted up as the scale of the impact has unfolded. Governments are clearly going to do “whatever it takes” in order to soften the economic blow on their populations and reduce the permanent impairment of the economy. We are encouraged by this.

 

Although it may not feel like it, in economic terms we believe the virus will probably be a temporary shock. One lesson for the future is that we should resist the temptation to view this (or any new) economic shock through the prism of previous shocks. The huge policy response means the recovery should be much quicker than normal. However a fiscal (government spending) driven recovery will lead to a different set of winners. We are giving a lot of thought to this and we hope to share our conclusions with you soon. How long the restrictions last depends on the speed of the spread of the virus and its containment. The analysis and monitoring of this is muddied by the differing testing and reporting methodologies globally. We are also aware that the scale of the economic dislocation and the risk that the virus lingers mean a swift recovery is not guaranteed.

 

We believe that we have probably passed the point of maximum panic in markets (as evidenced by dislocations in Government bond markets which have settled down in response to proactive government and central bank action). We do not feel that we have reached maximum pessimism. Accordingly last week’s sharp rally in equity markets is unlikely to be the bottom.

 

In this environment of rapidly evolving news and volatile markets we continue to stick to our investment philosophy:
  • Invest for the long term. It is more important than ever to invest with a long-term time horizon both to weather this storm but also to capture the opportunities
  • Stick to the long term plan. Our financial planning includes a stress test of extreme market events and will work if you stick to it.
  • Remove emotion from decision making and recognise that volatility will generate opportunity.
  • Look to invest in markets that are attractively priced for their long term prospects, bearing in mind that those that have fallen the most may not be the cheapest.
  • Retain diversified portfolios. Even more than usual a well-diversified portfolio is essential for dampening the risk

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