This article was published in the National Post on February 29, 2020. It is being republished with permission.
by Tom Bradley
We recently did a seven-city client tour. It came at a time of heightened sensitivity around trade, politics and the next recession. These kinds of issues don’t play much of a role in our investment process or feature prominently in our presentations, but this year it seemed necessary to explain why. China, the U.S. election and the economy were in the room and the coronavirus was coming in the side door.
Before I address the virus, I want to provide some background. When looking at the possible decisions we can make to enhance client returns, we prefer to focus on ‘bottom-up’ research on individual companies and securities. Gaining an edge at this level isn’t foolproof, but the odds are better than trying to time the market through ‘top-down’ macro strategies.
I say this because it seems investors are always obsessing about something, and it’s extremely hard to predict what the next hot button issue will be. Some pop to the surface after simmering in the background (debt; deficits; technology disruption), while others come out of nowhere (the coronavirus, for example).
It’s even harder to gauge how these issues will affect stock prices. The relationship between economics and stocks is extremely sloppy. For example, the Greek debt crisis (2011) and budget gridlock in the U.S. (2012) caused far more volatility than was justified.
Economists would likely disagree with me, but we’ve found that elections, budget standoffs, policy announcements, trade tussles and economic slowdowns rarely change our estimates of what companies are worth.
So, bottom-up managers don’t try to get ahead of these issues, but instead look to take advantage after they’ve occurred. This usually means buying stocks that have been unduly tarred by the macro brush. Keep in mind that in the early stages of these selloffs, investors aren’t very discriminating. Everything goes down and the information flow is not particularly good. It’s fertile ground for active managers.
Is the stock market catching a virus?
The coronavirus is proving to be highly contagious, but what about its market impact. Will it be a one-week wonder or have a lasting impact? There’s no doubt it’s bigger than most political-economic risks, both in human and economic terms, but the damage so far can be categorized as ‘short term.’ Customers are avoiding stores and shipments are being held up, but a good portion of the revenue will be delayed, not lost. If the virus spreads, and possibly becomes a pandemic, this will change and companies that are unprofitable or highly levered will be tested.
But don’t read this week’s market decline as being a decisive statement about the virus. It was as much about investors’ lack of preparedness and complacency around risk as it was about the potential pandemic. The state of the world economy is fragile. Growth is slowing, trade relations are testy and debt levels are higher than they’ve ever been. Consumers and governments have been leaning heavily on near-zero interest rates, a tool that’s usually reserved for recessions and economic shocks.
And we shouldn’t underestimate the stock market’s ability to assess a risk, adjust to it and move on. It will finish this process well before the coronavirus is officially under control.
In face of the current uncertainty, my advice is to take care of your portfolio the same way you’re taking care of your family’s health.
Stay close to home — In investment terms, this means sticking to your long-term asset mix. If you don’t know what’s going to happen, then there’s only one place to be — right on the mix of asset types that best fit your goals and time horizon.
Be hyper-vigilant — Washing your hands, not touching your face and avoiding coughing colleagues are all good health precautions. For retired investors, vigilance means having adequate cash reserves to draw on if markets continue to roil. For those who are building their wealth, hygiene means sticking to their TFSA and RSP contribution schedules. Down markets are a gift for accumulators, and should be accepted enthusiastically.
Maintain social distance — I don’t know that this is necessary in Canada yet, but scary times are when investors are most vulnerable to radical views. Beware of grand pronouncements from friends and colleagues. Doing what makes sense for you is what’s important.
And remain calm — Emotion and investing are a bad combination.
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