The Central Bank of the world, the Federal Reserve, protects your portfolio. 2020 started out promising. The world was spinning at full speed. But the COVID-19 virus suddenly brought the world, as we knew it, to a standstill resulting in battles being fought on three fronts:
1) Firstly, this is a health crisis of unprecedented proportions in modern times.
Let there be no doubt that human genius will overcome this crisis as well. Thousands of scientists around the world are busy trying to save us from this virus. Research is being performed in both university laboratories as well as in pharmaceutical companies. The international collaboration between all these scientists and laboratories will speed up the search for a medication as well as a vaccine.
In addition, companies outside the pharmaceutical sector are also allocating considerable funds towards fighting this crisis. Think, for example, of 3M, GE, Ford, Microsoft, Amazon, Alibaba and many others. Also, LVMH’s cosmetics department will make and distribute free hand sanitiser gels, whilst Pernod-Ricard will supply pure alcohol for making those hand sanitiser gels, etc. Many of the companies in which you are invested are thus showing themselves at their best.
But above all, let us not forget all those health professionals and everyone else in an essential profession who are the real heroes in these dire times.
2) The second front concerns the real economy.
The hole that is being blown into the real economy is probably much larger than the financial crisis of 10 years ago. The big question mark, however, remains how long we can keep our economy at a standstill. We are all aware that this current situation is not sustainable. This could make the solution worse than the problem.
Meanwhile, the government is playing its role. Indeed, the national debt will increase sharply. But, despite all of this, now is a good time to get into debt. The current low interest rates create an exceptional opportunity.
For example, European countries could raise billions of euros by issuing long-term government bonds and then put that money to work in the real economy over the coming years. It is the right approach to achieve a strong recovery after this health crisis is over.
The corporate world is taking the lead here. Over the past few weeks a record €500 billion was raised through the issue of various corporate bonds, still at relatively low interest rates. This also goes for the companies in which you are invested. These companies issued more than €100 billion, purely out of precaution. This enables them to look beyond this crisis, knowing they will make it.
3) The third front concerns the financial superstructure: the financial markets.
This is where you, as an investor, and CapitalatWork as your asset manager, meet each other. The portfolio that you have entrusted us, depending on your risk profile, consists of equities, corporate bonds and government bonds.
No external funds, no raw materials, no structured products, no surprises.
The shock has been severe, with stock markets plummeting roughly 30% in just a short period of time in combination with chaos on the bond markets. This is where the Central Banks have assumed their responsibility. In particular, the “Central Bank of the world”, the Federal Reserve (the Fed). It has achieved two crucial things through a variety of programmes:
– First and foremost, it gave guarantees to the business world that they could count on the Fed to provide sufficient liquidity.
– It then ensured that the rush on the US dollar on the international markets calmed down. After all, don’t forget that in times of crisis, there is a considerable demand for US dollars, which can lead to a liquidity crises. All of the commodities markets and entire industries, such as aviation and emerging market debt, are all settled in US dollars.
In the meantime, calm has returned somewhat, and for that, we can thank the Fed. It ensures that our companies have “Staying Power”.
All this brings us to your portfolio.
1) Equity portfolio
The equity portfolio has dropped considerably this past quarter. The stock markets are roughly 30% below their peak. The most important anchor points we have are the Free Cash Flows that our companies achieved in 2019. We are confident that most of our companies can grow back to profitability. For those who are invested in our companies at today’s prices, that 2019 profitability means a Free Cash Flow yield of approximately 8%. This is particularly high in a world where interest rates might remain close to 0% for a long time to come. Over and again, we have performed a detailed solvency analysis of the companies in which you are invested. Remember the golden rule: ‘the real problems always start with too much debt’.
Large listed companies are enjoying a significant advantage in the current situation. They can now finance themselves at the Central Banks, if necessary. But they are trying to prevent that. In recent weeks, our companies have issued approximately USD 75 billion worth of bonds. They are profiting from the current low interest rates. You understand why they are doing this. You understand which companies will survive this storm. “Staying Power”
2) Bond portfolio
The bond portfolio was a safe haven during the past quarter, thanks to a mix of corporate and government bonds we have in our portfolios. Corporate bonds of companies with “Staying Power”. And best-in-class government bonds such as those from Germany, the Netherlands, Australia or the United States. Countries that surely will repay their debts. “Staying Power”
We conclude with our “golden rule” of investing: diversification.
With us, you are invested in top companies with a global diversification. We are not invested in companies active in oil or other commodities. The oil sector is in great crisis due to a price war being fought between Russia and Saudi Arabia. At a time when global demand for oil has fallen sharply. Nor are we invested in banks. During this period, they are being asked to do their bit. At the request of the European Central Bank, many European banks have cancelled their dividends. As a result of this, bank shares have dropped sharply.
With us, you are invested in a well-diversified bond portfolio of top companies and credit worthy governments.
However, the “Staying Power” of your portfolio does not mean that the prices of your investments from now on will only go up. In the coming weeks, we will undoubtedly be faced with continued strong volatility. Taking into account the economic and financial prospects, we all know that caution is advised. It is therefore important to remain consistent with our investment style and continue to rely on our philosophy and approach.
It goes without saying that we are closely monitoring the markets as well as your portfolio and will communicate with you about further developments in due course. As always, we remain at your disposal to answer any questions you might have.
The Management of CapitalatWork Foyer Group