Weekly update - What a difference a week makes
Last week is certainly a week that few of us will forget anytime soon. We had rapid developments on the spread of coronavirus, followed by unprecedented responses from governments and all set against the backdrop of some of the most volatile markets for many years. So as we start another week where many of us will be getting used to big changes in our daily lives, we wanted to take stock of where we are today and offer some reassurance that Ravenscroft continues to operate as normal. And while we can’t guarantee that there will be toilet paper on the supermarket shelves, we can promise that our team is working hard so that you can rest assured your money is being looked after.
Looking back, Monday certainly set the tone with world equities kicking the week off by falling nearly 8% as the oil price lurched downwards thanks to Saudi Arabia and Russia locking horns in a price war. This illustrates the key issue, in our view, for investors at present. We know that the first order effects of the coronavirus outbreak will be bad and markets have moved a fair way to pricing that in now. The question on which we have much less clarity is what will the second order effects be? The collapse in the oil price and the resultant tensions within the “OPEC+” group are just one example. Beyond that, could the outbreak cause a global recession, a renewed European debt crisis or a more general corporate default cycle? These scenarios are highly uncertain and, as a result, are not currently accounted for in market pricing.
The truth is that nobody truly knows what the final outcome will be. Similarly, while we do know that the current market sell-off will end, what is less certain is how low asset prices will go before they find the bottom.
You can imagine a scenario where a strong policy response and a resultant slowing of new infections allows markets to look through to the second half of the year and the decline to halt relatively soon. Equally, if the news continues to darken, you could see a situation where the coronavirus outbreak goes down in financial history alongside the tech crash and the global financial crisis. In which case there may be more drama to come before life can return to normal.
At times like these, when the fog clouding the crystal ball is even thicker than usual and resembles a bad day at Guernsey or Jersey airport, we find it useful to look back at history for context. While the triggers of dramatic market moves are often novel, the resultant market turmoil is surprisingly regular with major sell-offs occurring roughly once every 10 years. If we look back at history, we can compare the current issues to other novel events and ask ourselves, “What was the right thing to do in these cases?”
Data: World Equities - MSCI World Index in USD from Jan 1970 to Feb 2020
In our experience, provided you go into periods such as these with a carefully managed portfolio and have the time to wait it out, high quality assets will recover. The key is not to try and get out with the intention of getting back in later. This sort of “market timing” is fraught with practical and emotional pitfalls that more often than not results in a much worse outcome than simply being patient.
As professional investors, our job is to take this one step further. We do this by looking at valuations, by which we mean asking the question, “How well am I being paid today to take on the inherent risks of investing?” The goal is to be countercyclical, as Warren Buffet put it so well, to be: “Greedy when others are fearful and fearful when others are greedy”
How the Ravenscroft investment management team is looking at the situation
Over the last few years we have been getting increasingly fearful as we saw valuations getting higher and investor attention focusing much more heavily on return than on risk. This led us to go into 2020 with some of the most defensive portfolios we have had since the global financial crisis and we are pleased to be able to say that they have held up well as a result.
Now with equity markets around 20% lower than the 2019 year-end and fear by far the largest factor driving markets, it will at some point be time to get greedy. We are tracking valuations closely with the aim of chopping any overpriced assets and adding bargains to help set our client portfolios up to weather the current storm and produce returns in the next stage of the cycle. While valuations will give us a guide, they will not show us the bottom and we will no doubt be reminded of how hard it can be to put those seemingly simple words into practice and buy when everyone says you are mad to do so.
So what should we all do today?
Well if you are a private investor the best approach is probably to ask yourself, was I happy with my portfolio at Christmas? If the answer is yes, then you are likely to be best off doing nothing. If the answer was no, then perhaps a call to your advisor is in order. If you are actively managing a portfolio, then there are a few key questions today:
1. Are there assets in my portfolio that have not priced in the risks and could be sold to raise cash?
2. When and where will the opportunities arise?
For us the issue is severe enough to demand a larger margin of safety than usual, however even in the face of a viral outbreak, there is a price at which stocks, among other assets become a bargain. We might not be quite there yet but if this week looks anything like the last then we could be there soon.
Keeping Ravenscroft working for you
Our team has been working hard over the last few weeks working to ensure that we can keep working if, or when, additional restrictions and challenges are encountered. As you would expect we have well-developed plans for dealing with disruption and capacity for a large proportion of our team to work from home should the need arise.
We conducted a test last week with around a third of the office spending a morning working from home and it was a success. From Wednesday this week, our offices in Guernsey, Jersey and the UK will be splitting in two with half on-site and half working from home on a rotating basis. We are confident that we can keep essentials services up and running even if we have to fully close the offices.
As always, if you have any questions or concerns please feel free to give us a call and we'd be happy to talk to you in more detail.