Portfolio Manager Marc Pinto discusses the importance of staying active to navigate the downturn and position for an eventual recovery.
- As the coronavirus pandemic progresses, investors are currently focused on understanding the number and severity of new cases and the ability of governments and health systems to cope with the outbreak.
- Until there is greater clarity on the trajectory, it will be difficult for markets to find stability.
- While markets wait for answers, patient investors may be rewarded by focusing on quality and positioning their portfolios for the eventual recovery.
The global pandemic has caused extreme volatility and uncertainty in markets as investors try to process the potential social and economic fallout. What is the trajectory in terms of new cases? Will the spread in the U.S. be similar to the hardest-hit countries so far? Could it be worse? And at what point will we see cases hit their peak? These questions have caused economic demand to grind nearly to a halt, limiting the effects of vast monetary and fiscal stimulus. Until there is greater clarity, it will be difficult for the markets to find any type of stability. Given how unpredictable the situation is, it seems prudent to position defensively but also to stay mindful of an eventual recovery once the uncertainty lifts.
Efforts to Stimulate Demand
Given that the extent of eventual damage is unknown, we are focused on actions being taken now to blunt the social and economic impacts, which we believe are inevitable. These include policy responses from governments and any mitigating actions both from a monetary and fiscal standpoint. The Federal Reserve (Fed) has initiated asset purchases to add market liquidity in addition to cutting its benchmark federal funds rate to 0%. At the same time, the U.S. government is beginning to introduce relief packages to aid workers and rescue certain economic sectors, like airlines, that have been hardest hit by weak demand. As we have mentioned previously, while uncertainty remains high, the effectiveness of stimulus efforts will be hampered, but as we gain more clarity, the efforts being made now could lay the foundation for eventual future growth.
Staying Active Through a Fluid Situation
While much of the population – and in turn, the economy – has gone into forced hibernation, we believe it is important to remain active from a portfolio perspective. Markets are currently dependent on news flow and changing data as the pandemic progresses, thus we believe the turbulence lends itself to a hands-on approach. As allocating defensively can help preserve capital in a downturn, adjustments can likewise be made to position for an eventual recovery.
Upgrading fixed income credit quality and managing duration for the variations in global and U.S. interest rates may provide ballast in times of market turmoil. In equity sectors, we see some opportunity, although we are mindful of the environment and believe it is prudent to be extremely selective. Given the global pandemic, the health care sector may remain resilient, as it has lower-than-normal economic sensitivity and is home to companies that will provide the therapies, vaccines and other related measures to help alleviate the virus. Conversely, travel-related industries, including airlines, hotels and cruise ships, have suffered extreme curtailment in demand. While we believe demand in industries like travel can eventually recover, these examples underscore our view that now is a time to be selective in terms of investment exposure.
Upgrading Quality and Positioning for Recovery
Based on valuation levels, we believe opportunities to position for an eventual recovery are beginning to appear. Companies not in the eye of the figurative hurricane that generate cash and have strong balance sheets may be able to withstand the inevitable economic slowdown. Companies that are less dependent on the capital markets for liquidity and funding should fare better and arguably could come out of this downturn in an even stronger competitive position. On the other hand, companies that have more leveraged balance sheets and that are being exposed from a business standpoint are finding it difficult to raise capital, clouding their future prospects. Overall, as companies have repriced broadly, it may be wise to reassess risk-adjusted return opportunities.
Although we are early in this crisis and expect further market uncertainty, we have seen difficult periods like this before. We feel confident that investors who remain aware of increased risk, but also open to potential opportunity, can persevere during these difficult times.
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