We cannot repeat it often enough: corrections such as those we are seeing today are an inevitable part of investing. The average correction, the kind that we experience each year, is about 14%. The current fall of approx. -30% is exceptional. However, the speed at which it is happening is very exceptional.
The reason, as you well know, is the Coronavirus. In professional jargon, we call this a black swan, meaning a surprise event with disproportionate consequences and responses which really should not be happening. So it’s just like a black swan, because swans should be white.
As far as your investments are concerned, it is advisable to be attentive and cautious after the huge stock market sell-off. Panicking is human, however it is not necessary. Just think of the appropriate response to the virus itself. After all, the vaccines are in the making.
For the first time, oil prices have fallen by about 50%, with the obvious losers being the oil-producing countries and the entire complex of oil-related companies. However, for consumers worldwide and even more so for many of our companies, this is a bonus that should not be underestimated.
Also, the “last man standing” has fallen and US Dollar interest rates have dropped dramatically in recent months. They now seem to be on their way to zero, as we have seen in the rest of the world. This is also a bonus that should not be underestimated for many of our companies in the coming weeks, months and years as interest charges on outstanding loans will fall sharply.
Finally, massive pressure will be on central bankers and governments across the globe. The monetary and tax stimulus directed at the economy may take unprecedented proportions if that is found to be necessary:
1) Interest rates will be reduced further.
2) Central banks will grant credit to companies and sectors in difficulty.
3) Politicians will announce tax packages to support the economy.
These three stimuli should always be weighed against the price at which you can become a shareholder of some of the strongest companies in the world today. And this price is particularly interesting for those who have at least a five-year plan.
Our calculations show that current share prices are reflecting a fall in earnings of about -33% with no recovery thereafter. That profits should fall by about -33% this year is something that we can imagine, but not returning to profitability after this crisis has been overcome seems, to us, to be a far too pessimistic scenario.
Conclusion
Volatility has been there since time immemorial, and this volatility creates opportunities for active investors. Uncertainty and the search for a new equilibrium are causing very sharp price fluctuations, yet we invest in shares and bonds where liquidity is very high. In other words, this means we can deal with exaggerations at any time. So, we are actively managing, and not just in our share portfolios, in a situation where companies can now be bought at very interesting prices. We are also opportunistically managing our duration (interest rate sensitivity) in our bond portfolios. Furthermore, we have also seriously reduced dollar sensitivity in our bond portfolios.
A black swan is very rare and always gives rise to short, severe and, for many, painful stock market malaises. Current prices already reflect a great deal of pessimism, but for the patient investor with a horizon of more than 1 week, 1 month, or 1 year, this is a time to buy. In the short term, however, the volatility will remain until this virus has been tamed.
Of course, we are monitoring the markets and your portfolios on a daily basis, are very active in managing your assets and will inform you about further developments in a timely manner. As always, we are at your disposal to answer any questions you may have and to listen to any concerns you may have.
Yours sincerley,
The Management of CapitalatWork Foyer Group
