The current situation regarding Coronavirus needs no introduction, however you may be wondering how we plan to navigate the threat of a global pandemic from an investment perspective.

Coronavirus – How will this likely impact the investment environment?

The Coronavirus (“COVID-19”) outbreak edged closer to pandemic status over the weekend as news broke of an unexpected surge in cases outside of China, particularly in Italy and South Korea. The news sent financial markets into a tailspin on Monday and Tuesday with the Dow Jones Industrial Average losing approximately 1900 points as it fell 7.0%, the FTSE 100 fell 5.2% and the FTSEMIB (Italian exchange) fell 7.1%. This note is an update from the Investment Management team giving you some insight into how markets may react and how this may impact your investment with us.

Global economic growth was expected to stabilise this year after slowing during 2019 but the data continues to be disappointing. An unchecked Coronavirus has the potential to significantly weaken the growth outlook and raise the risk of recession through the impact on consumption, investment, supply chain disruption, confidence and overly-leveraged corporates.

Whilst we may not have reached pandemic status, the realisation that containment measures thus far are not working effectively has led markets to start considering the potential for a broader economic impact relating to this outbreak. Unfortunately, there has been a tragic human cost associated with this. However, we are thankful that the data is starting to show that this coronavirus, although subject to ongoing revision, appears to be far less deadly than the severe acute respiratory syndrome (SARS) that was around in 2002-03, which had a case-fatality rate of 10% vs 3.3% global fatality rate for COVID-19.

Nonetheless, authorities won’t stop trying to contain its spread and this will come at a cost in one way or another for the global economy. Therefore, in the short-term, risks are skewed to the downside for global equities and caution needs to be exercised. Indices are coming off all-time highs and valuations in many of our favoured sectors and stocks are above fair value.

Markets are forward-looking mechanisms attempting to price in future expectations. At the start of this year, a growing global economy was expected to provide a positive backdrop to corporate earnings. With plenty of liquidity - thanks largely to accommodative monetary policies from central banks - the environment was ripe for the continuation of a risk-on environment, which was positive for growth assets such as equities. Recent events have questioned this position and investors have been quick to take profits. Should the situation deteriorate from here, particularly outside of China and in a vulnerable economy such as Europe, we should expect further volatility.

Our Investment Management Approach It is important to note that we do not hedge equity market risk, nor do we short specific stocks. Our stance is to invest into quality, cash flow positive stocks that are aligned with one or more of our long-term investment themes. We do this through 3rd party managed funds in our multi-manager strategies and directly in our Blue Chip strategy. We primarily use valuations as our guide to making asset allocation decisions, not predictions on what may or may not happen economically, politically or socially.

Investment Strategies
Multi Manager Strategies including: Cautious (Global Income Fund), Balanced (Global Balanced Fund), Growth (Global Growth Fund)

Over the last three years, our multi-manager strategies have gradually reduced the equity exposure within them, de-risking as equity markets and valuations in our favoured sectors of the market have been creeping higher; above their long-term averages. Across the three multi-manager strategies (Income, Balanced, and Growth) the equity weights currently stand at 22.5%, 50% and 74.5% respectively. These weightings are at, or just below, our neutral equity positions, evidencing our relatively cautious outlook going forward. In tune with this reduction in growth assets, we have, particularly in the Income and Balanced strategies, used the proceeds to allocate to more cautious fixed income positions in the form of short dated, high quality corporate bonds. These allocations should reduce volatility and protect value on the downside.

On a look-through basis, equity positions across our three multi-manager stocks favour high quality, large cap businesses operating in relatively defensive sectors; namely Healthcare and Consumer Staples. Our other ‘overweight’ position is in technology, which has been the stand out generator of returns over the past five years. Importantly, should a recession be triggered by this outbreak we are underweight the more economically sensitive and cyclical areas of the market such as energy, mining, and materials.

Global Blue Chip (Global Blue Chip Fund)

In our Blue Chip strategy, which is 95% equity, 5% cash, we also have overweight allocations to the healthcare and consumer staples sectors that are typically more defensive than other areas of the market. The virus outbreak has had a greater impact on companies whose exposure to China is significant, particularly technology stocks such as Apple and Intel who rely on the region for supply chain reasons and luxury goods companies who generate significant sales from the region (LVMH, Richemont and L’Oreal). However, we are also starting to see this spread to other consumer related stocks including Visa, Nike, Diageo and Unilever, as well as those relating to travel - namely Disney.

The team’s valuation monitoring has seen reductions in some of these businesses over the past quarter. Such reductions include Apple, LVMH, 3M, and Walt Disney. We have also sold outright Rolls-Royce, arguably the most vulnerable stock.

As we are stock pickers, we can define the exact exposure we want and we have a 0% weight to the more cyclically sensitive sectors such as energy, mining and materials and underweight technology. That said, we will not be entirely immune and investors should be prepared to experience some volatility.

What Will We Do Next?

As we have talked about before, we will let valuations, not predictions, dictate our next move and right now, the team is comfortable with the current positioning. We have spent the last few years getting more defensively positioned for a market pullback, without knowing what would be the event that finally caused it. It is important during times of stress to think long-term. In our recent investment committee meeting the feeling amongst the team was to remain vigilant and cautious and to let hard facts dictate the next move - and not let this outbreak cloud decision making. Those facts will be company valuations, and our analysts are busy watching market, fund and individual stock valuations with a view to taking opportunities should they arise.

What Should You Do Next?

Macro-economic concerns are not new. However, the news is awash with headlines of a virus that can infect people, make them ill and in some cases kill them. This is an additional concern for investors to have to deal with that will no doubt pull on the emotions of many. It is not unusual for humans to let their emotions dictate their decisions, however, when investing this can lead to poor actions. If you are concerned please consider the following:

• What were my true reasons for investing?
• Was I honest about my time horizon?
• Do I truly understand the strategy that I am invested in?
• Do I truly believe it is right for me?
• Do I trust the portfolio management team at Ravenscroft with my money?

If the answer to all of these is yes then your next move should be to focus on something else. If, however, you can’t shake-off that niggle, you should contact one of us as soon as is convenient for you. Finally, if the virus reaches our shores, the Company will put into effect its business continuity plan to ensure the continuation of services to our clients and the management of their investments accordingly. Importantly, all our advisors will be on hand to talk to you should you want to discuss your investments.