Client Update - Coronavirus - 9th April 2020

As the days move on towards a bank holiday, I am not sure that I have anything extraordinarily insightful to add to previous comments about the situation we all find ourselves in.

Internally, other than hoping that all our clients and staff are well and staying safe, we do discuss if we should be brave enough to “buy more equity when there’s blood on the streets”? This seems to be what every famous investor has said throughout history. Although, right now, it feels a little early to be too brave.

Have markets fallen enough? Does a drop of 30% on Wall Street represent the true economic collapse we are witnessing on Main Street for 2020? And what if some of this correction was just that, a correction from 2019 market exuberance. Let us not forget the favourite question from clients in 2019: “Are equity markets expensive?”

The immediate outlook for investors is about the shape of economic downdraft we are in. If it is “only” a total economic collapse for one or two quarters and we return to normal quite quickly, then the Net Present Value of future cash flow streams from companies will hardly have skipped a beat. Investors may already presume that we will get over COVID-19, which appears statistically robust and predictable. Sadly, no one knows how consumers and companies will respond after an unprecedented shutdown. How rich will consumers feel when they are let out and when will animal spirits return to start driving new investment?

Unfortunately, I cannot answer this question today.

We all know the randomness of the short term. Falling markets are different to rising markets. They do not occur as often, and corrections happen much faster. The resulting strain on valuations means that significant pricing anomalies can emerge for a short period of time.

We are not in the business of predicting markets. Instead, we spend an awful lot of our time trying to figure out which of our holdings have been unfairly punished (or rewarded) by fearful investors. Our investment team have excelled themselves over the last month speaking to all of the funds we invest in. We know where the risks, opportunities and pressure points lie across our funds.

Over the last few weeks we have been selectively adding to defensive equities such as healthcare and technology that have taken an unjustifiable hit from COVID-19. Even if we are wrong on the timing, we know that these businesses have solid balance sheets to get through a prolonged downturn. At the same time, we have trimmed some of our best performers whose businesses have shown great strength during the crisis.

We are long-term investors and do still favour strong cashflows and “Quality Growth”. Where we think the fall in an investments price has created a valuation anomaly, we are trying to be bold on your behalf.

As always, please stay safe and well.

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