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An overview with Guy Myles

Investment Commentary: February 2020

Guy Myles, 17 February 2020

Many will be concerned by the recent global stockmarket falls linked to the Corona virus outbreak. This is our assessment of the situation and what we are doing to manage the impact.

The markets are falling because people are worried about the economic damage that will be caused by efforts to contain the virus and the cost of people stopping many activities to try to avoid catching it. These could have a significant impact on global GDP in the short term. It’s obvious that there will be some impact but we are comfortable that our strategy for clients is correct and protects their assets from the falls whilst allowing us to take advantage of any opportunities that may appear.

It is important to realise that this virus is not particularly deadly. It kills one fifth of the number of people that would die from a SARS infection for example. It is more akin to a super charged flu which already kills a large number of people every year. What distinguishes Corona from SARS and other deadly viruses is that it is very easily transmittable. Most people who catch it do not have serious symptoms or require hospitalisation. The effects are felt strongly by the elderly or those with other existing health issues. These lives are just as important, of course, but for most people contracting the virus will not lead to a serious situation. We should also expect western healthcare systems to cope better with patients and the ultimate death rate to be lower than the 2% figure quoted today. For most people the impact of this outbreak should be economic and lifestyle, not health-related.

The global containment efforts are the reason for the stockmarket scare. China has closed large areas from travel and on a much smaller scale we are seeing similar moves in Italy and Korea. As the virus spreads we should expect more restrictions on travel and even efforts in some areas to restrict movement. This may seem draconian but it is a sensible approach to try and slow the virus progress. Delaying the outbreak to summer will greatly slow the progress of the virus as the seasonal flu effect naturally declines every year. Corona should follow the same pattern. We also expect there to be a workable vaccine early next year so the longer we delay the progress the better the outlook for global health. Slowing progress also lessens the pressure on health systems that would struggle if very large numbers of people are sick at the same time.

The potential economic effects of this outbreak could tip many countries into recession. The characteristics of this, however, are more likely to lead to a V shaped recovery once fears slide. It is very likely global governments will complete a coordinated stimulus. Overall it isn’t attractive to cash in investment portfolios and run to cash.

As investment managers, with our own portfolio and in our research for the other solutions you invest into, we have placed a great emphasis on defensive positions and diversification. This has been for exactly this kind of situation as we intend to retain more value in our client portfolios at the bottom of the next recession than our competitors. This generally means lower equity weights, more government bonds and nothing in illiquid investments versus other fund managers. This should mean we fare much better during periods like this and are in a position to take advantage of any opportunities that come up within markets.

In terms of performance, year to date the FTSE All Share has fallen by 13.5% as at today. Comparatively, our model portfolio returns year to date are shown, below. Returns have been protected somewhat by our overweight positions in gilts and government bonds, which have risen 4-5% this year. We never like to see valuations go down, but we are required to invest inline with clients’ risk appetites and therefore all investments are exposed to risk. However, we do our best to mitigate some of that risk by diversifying and taking disciplined decisions that we believe are in our clients’ best interests over the medium to long term.

Year to date (27th Feb)

Categories: Market Commentary

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