Market review
Perhaps the biggest global (synchronized) shock we’ve witnessed in the past few years came mid March with the already pre-announced / observed but heavily underestimated spread of Covid19 virus. Mainly advanced economies (having large share of GPD generated by consumption) were hit the hardest and some of the Equity indices suffered heavy QoQ losses (comparable to 2008-09 financial crisis). A likewise synchronized global response from the biggest Central Banks as well as Governments prevented a market implosion (due to ever building leverage from the last crisis). Ample liquidity which flooded the financial system across the globe
- People’s Bank of China (PBC) RMB 3trillion injection into their banking system
- European Central Bank (ECB) extension of quantitative easing (QE) by EUR 750bn
- Bank of England slashing interest rate by 65bps and launching GBP 200bn QE combined with GBP 300bn of guarantees
- Federal Reserve (FED) slashing interest rate by 100bps and launching USD 700bn package of QE
managed to do it’s job by decoupling market prices from it’s fundamentals, which as Nasim Taleb would say, have been shaken by a black swan. Such extraordinary times required extraordinary response.
Despite worsening projections for GDP growth, unemployment as well as business profits the market price recovery between March and June 2020 was remarkable. Valuation principles in which a company (or index) should reflect the discounted present value of future cash flows were overshadowed by the already announced and soon to be even expanded monetary support ~ markets “recovered” from the initial shock.
Perhaps a medical definition (instead of an economic one) would be a better fit to describe the event(s):
The application of adrenaline is one of the last things tried in attempts to treat cardiac arrest. It increases blood flow to the heart and increases the chance of restoring a heartbeat. However it also reduces blood flow in very small blood vessels in the brain, which may cause or worsen brain damage.
Performance highlights
During last two quarters, which basically due to Fund’s inception (02.2020) is 4 months instead of 6, we’ve managed to navigate the March shock caused due to 1st lockdowns and emergency measures by staying on course with our Strategic Asset Allocation and gradually shifting from Cash & Equities position to an overweight in Equities and slightly higher concentration in Commodities, Alternatives compared to our Benchmark. Such strategy helped us to weather the storm and we’ve managed to protect our investors from March 2020 drop.
On the other hand, we were not benefiting from the (March – June) price recovery as the Equity layer of our Strategy focuses on financial, insurance, automotive, cons. cyclical and industrial segment all of which are still discounted given the changes & challenges they might face going onwards. We are convinced that the leaders we’ve identified in the respective industries, which have a healthy balance sheet, sufficient liquidity, low leverage and good outlook for Cash Flow recovery compared to their peers would benefit the most, once the situation improves. This could happen either by slowing the spreading of virus and temporary softening of lockdowns (low likelihood) or by first indications / news about potential fast track vaccine development. Additional support will be guaranteed by recently announced Fiscal support programs aiming at stabilizing both the consumer as well as the business sector.
Ample liquidity and investor’s confidence in how well the economic / health emergencies are being managed will drive the markets and create some headwinds
Outlook
The majority of macroeconomic projections for the next 2 quarters is strongly correlated to potential discoveries of vaccines (having a positive effect on markets & economies) as well as autumn / winter season and the associated higher spread of Covid19 infection (negative effects). There’s a high probability that some sort of winter / Christmas / New Year lockdown(s) will happen in major EU countries and potentially in USA.
Low rate environment & strong fiscal response in most affected countries is here to stay and may be even stronger compared to what we’ve witnessed until now. The macro theme of ignoring fiscal deficits for the time-being is a double edged sword, which will take (in the long run) it’s toll on future growth, however for now, with low rates and strong Central Bank support (around the world) no one worries about the medium / long term implications. Such situation coupled with low real yields for a broad spectrum of Fixed Income instruments (incl. Government, Quasi-gov, Supranational, Corporate bonds spreads) convinced us to remain underweight the entire Fixed Income segment.
Market returns remain to be driven mainly by what we’ve mentioned above. Strong economic rebound in China (even without having a vaccine) offers insights what we could expect during/after some sort of 2nd/3rd pandemic wave (in majority of developed markets) under the assumption of having a vaccine or even multiple vaccines at disposal. That could dramatically lift the optimism both in terms of recovery potential as well as hopes of returning back to normal.