24 Mar 2020
Sudden falls in markets have pushed investors into selling up. In an article published in the FT, Simon Edelsten, co-manager of the Artemis Global Select Fund and the Mid Wynd International Investment Trust, cautions against this.
When markets go from high hopes to fear, they fall a long way.
Most fund managers started 2020 expecting economies to grow rather better than last year, for the new European parliament to stimulate renewable energy investment, for the new UK government to make progress on Brexit and for President Trump to boost the US economy and smooth his way to a second term. It has not worked out like that.
China, the workshop of the world has been in shutdown; Italy is too. Britain is yet to hit peak crisis, though the football is cancelled. Tourism has collapsed in many parts of the world and consumers are cautious, affecting overall demand — Chinese car sales were down 80 per cent year on year in February. Governments have acted vigorously to contain coronavirus contagion, but this has had the consequence of damaging economic confidence.
On top of this, Opec and Russia have failed to agree terms to control the supply of oil.
Therefore, markets face an unpleasant combination of factors: the likelihood of recession in many major economies; sharp declines in the oil, aviation and tourism industries; a weak motor sector and the deflationary shock of very low interest rates.
There are fears of bad debts rising within the banking sector, which is suffering from bond yields that have fallen and turned negative in many countries.
Banks have to hold a lot of bonds. Financial companies are significantly more robust after the regulatory changes in 2009-12 and I think governments are unlikely to have to support them. Regardless, the sudden falls in markets may have pushed many investors into selling up and self-isolating with a box set. That would not be my approach.
The depth and length of any recession is uncertain, especially one coming from two unrelated issues — the oil price and the virus. Sectors such as transport and tourism have been badly hit, but other companies are already guiding for a slower, but not disastrous first half of the year.
The coronavirus was an unexpected shock. China’s economic data this week showed the enormity of the impact, but stalling Asian infection rates — particularly in subtropical climates — provide hope that disruption from the virus will eventually lessen as the weather gets warmer. The companies that pull through will be set for a sharp return to growth from the new lows. China is cautiously returning to work, under new measures to limit the spread of the disease, and — for now — the Tokyo Olympics are still on.
Further ahead, the oil price shock could be a stimulus in emerging markets such as China and India, not to forget the US with its gas-guzzling consumers.
Japan’s economy has been in a “deflationary shocked” state for the past 20 years or so. The response of government has been extra-low interest rates and lots of quantitative easing — government attempts at pushing money into the economy whether business wants to borrow or not. It tends not to work. Yet this has not prevented investors from making money there.
The Japanese index as a whole has made little progress, especially financial stocks, but good quality growth companies and some deep-value stocks have given very good returns to those investors who have dug them out.
So the lesson is to be selective. This crisis has been bad for those holding tracker funds, which are indiscriminate. It has been especially bad, so far, for holders of UK trackers, where BP and Royal Dutch Shell make up 16 per cent of the index and banks another 6 per cent.
Equity market indices tend to have high weightings to old economy stocks with poor prospects. These companies often have quite a lot of debt, which makes them vulnerable in recessions. Many new technology companies have better growth, little debt and are resilient in slowdowns. As a fund manager, I am a fan of sectors including healthcare, renewable energy, software and semiconductors, and online services whose sales tend to hold up in recessions. Although the whole market has fallen, these areas are proving more resilient in the sell-off.
Such stocks are sometimes described as “expensive”, many being US quoted. They are certainly expensive relative to some of the old economy stocks that have been pummelled this month. But at times like this the Spanish proverb comes to mind: Lo barato sale caro — the cheap option works out being expensive.
Fill your bathroom with toilet rolls if you must, but think twice about emptying your portfolios — especially if you have had the sense over the past 10 years to be selective about the stocks and funds you have bought.
To find out more about the Artemis Global Select Fund and the Mid Wynd International Investment Trust and their positioning visit the fund pages at www.artemisfunds.com.