02.03.2020

Financial newsflash: Coronavirus, putting it into perspective

Following the outbreak of the Coronavirus, a shock-wave has hit the financial markets. In the past week, stock markets around the globe suffered as seldom seen before. During these dire times, we feel the need to share our views on the markets with you.

We are faced with a ‘black swan’ effect, since nobody expected this virus to go global, until last week. Especially not the extreme reaction and draconian measures taken by various governing bodies. It is not our intent to further elaborate on future developments of this virus; you can read all about it in the media.

What does this mean for your portfolio?

Those invested in equity have seen around 10% of last years’ profits evaporate over the last week.

A vicious correction, like the one seen last week, is extremely rare. To put it into perspective, a correction of this magnitude is in the top 5 over the past 20 years.

If you are holding bonds besides equity in your portfolio, you will notice the negative correlation between these asset classes is working to your advantage. You will notice your bond portfolio has risen by close to 3% since New Year. As a result of the flight into safety in Government Bonds. Hence, bonds will provide a safety buffer in volatile days. The interest rate on 10 year Treasury bills has dropped from ca 1.9% to ca 1.2% and on the German 10 year Bund from ca -0.2% to ca -0.6%.

–> Diversification between various stocks and/or diversification between stocks and bonds are fully at play in today’s markets and will limit your losses.

Quality of investments

The second layer of protection we offer is the quality of the companies in which we invest. This can be discerned on 2 levels:

–  Firstly, the balance sheets of most of our companies are of very high quality. Many of our companies have little to no debt and, most, have large cash reserves at their disposal.

–  Secondly, as an active investor, according to our investment process, we have always preferred sectors which are not capital intensive, such as software, gaming, asset management, etc. Hence, we are hardly invested in automotive, energy or natural resources. High fixed costs make companies potentially vulnerable. Important to note is also the fact that we have little to no exposure to the banking sector, as banks tend to suffer in a climate of falling interest rates and could suffer in this environment. Although most banks have healthier balance sheets than in 2008, their equity position remain in many cases fragile.

–> You are invested in high quality companies which can withstand stormy weather!

Do corrections offer opportunities?

For an active asset manager, these are moments where opportunities present themselves.

Recently, we have shifted the weight of our Government Bonds by reducing our Corporate Bonds.

We have, especially, increased our weight in US Treasury Bills and we have sold Corporate Bonds in companies with weaker balance sheets.

The above has positively contributed to the performance within our bond portfolios.

We currently hold many positions in US Dollar (equity as well as bonds) within our portfolios. To a certain degree we have hedged the risk of a weakening dollar within our portfolios (a risk which is far from certain).

At the end of last year, we already reduced the equity weighting within our portfolios in order to generate a cash buffer.

When the time is right, we will again invest this cash in a timely manner.

–> Volatility creates opportunities! Keeping calm and staying focused in times of crisis and panic are  important parts of long term success.

Temporary volatility?

Normally, after a severe market correction as this one, we would also point out the ‘interesting’ valuations of the companies in which we invest. But to be fair, the turmoil created by the Corona outbreak makes it very difficult to quantify the profitability of most companies, especially in the short run. By no means do we want to downplay the current crisis, and, most certainly, all companies will suffer (temporary) setbacks in their profitability. Each valuation needs to be reviewed with the necessary caution. For short term investors, this may be of importance. As such, it is reasonable to expect that we are facing an extended period of high volatility.

If the Corona virus does not turn into a global pandemic, the effect on the stock markets will be temporary. In the past, we have often seen media outlets blow news facts out of proportion, which can lead to fear. And we all know fear is a poor advisor!

CapitalatWork invests on the long term, in companies with high cash flow generation, and strong balance sheets with sustainable competitive advantages. We are not distracted by volatility created by temporary events. However painful this market correction is, history teaches us that these sharp drops are unique buying opportunities, rather than selling opportunities. Remember what happened during the SARS-outbreak in 2002/03.

It goes without saying, we are working hard to navigate your portfolio through this vicious storm. Whenever the need arises, we will communicate about future events which may be of importance. And, as always, we are at your disposal should you have any further questions related to the above.

Yours sincerley,

The Management of CapitalatWork Foyer Group

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