by Tom Bradley
The coronavirus (COVID-19) is a rapidly evolving story and is being well covered by the media. Its impact on the stock market is also being talked about. It’s becoming one of those macro issues that’s used to explain every move in the market, or at least, every down move.
As our regular readers know, the stock market is not that simple. Below we’ll provide some perspective, touch on the economic impact of the virus and review what we’re doing on your behalf.
Today’s market drop (3-4%) is being attributed to COVID-19 which is probably fair given the increasing effect it’s having on people’s psyche. But markets are complex organisms and driven by a multitude of factors. Prior to this week, the mood had been remarkably quiet and yet, positive. Stocks were strong and the appetite for other risk assets, such as high yield debt, private equity and real estate, has been nothing short of insatiable. Investor sentiment has been getting more bullish, even with the virus growing in importance.
Today’s market jolt tells us a lot about investors’ complacency around risk and lack of preparedness for volatility, and little about what’s ahead for the stock market.
So far, the disruption caused by the virus, while extensive, can be categorized as ‘short term’. Shipments are being held up and customers are avoiding the malls, but a good portion of the revenue will still occur in the future. Economic activity is being delayed, not lost.
As the virus spreads, and possibly becomes a pandemic, however, the impact may become ‘medium term’. If this happens, investors will become more discriminating and better identify the winners and losers. It will also become apparent that the long-term value of our portfolios will have changed very little.
Risk or opportunity?
As I said at our Where to From Here? presentations this month, we’re rarely going to get ahead of a new socio-political-economic event like the virus. It’s too hard to predict what will jump into the spotlight next, and which ones will amount to more than a one-week wonder. But when something does sideswipe our portfolios, we’ve been good at taking advantage of it – i.e. buying stocks that have been unduly hit by the issue.
So far this year, our fund managers have continued to be active, eliminating companies and adding new ones (more on that later), but this activity has been driven mostly by the unevenness of the market move. Stocks in the technology and interest rate sensitive sectors are up a lot this year while others are flat or even down.
In the Founders Fund, we’ve used the market strength to modestly reduce the stock allocation. It’s mostly been a case of simple rebalancing (i.e. strong stock markets) although COVID-19 combined with the complacency around risk helped prompt the move.
We don’t know how far the virus is going and how stocks will react but be assured, we’re taking care of your portfolio the way you’re taking care of your health. We’re staying close to home, being hyper vigilant and remaining calm.
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