Message from our CEO – COVID-19 Update

We are sure that you all have seen the media headlines about the global equity market declines this week and whilst we agree that there will be a financial effect felt by the global economy, we can’t help but think that investors are behaving in a similar fashion to those swarming the local supermarkets across the global shopping centres, clamouring for the last roll of toilet paper.

We can safely assume that those companies and sectors that are heavily reliant on travel and tourism, such as airlines and hotel groups, should be sold off and will witness sustained earnings decline. However, when you see companies being oversold that will have little to no financial impact from the virus, then you know that the “baby has been thrown out with the bathwater”.

We have been monitoring the data closely, and believe that for investors the good news is that the impact will be temporary. Earnings should be increasing by the end of the year, as should the stock market, and we expect that this volatility will create opportunities for investors in the right sectors and regions.

A sustained economic recovery will be dependent on what a group of politicians can thrash out between them, in what will be an election year in the U.S.   The negative market reaction to President Trump’s address to the nation, making his first ambitious proposals on dealing with the crisis, underline that the next few months for investors will be volatile.  Elsewhere, the UK’s budget indicated big spending to combat fallout from Brexit and the COVID-19 virus.  The European Central Bank (ECB) could slash its benchmark interest rate, according to analysts at JPMorgan Chase. The biggest U.S. bank predicted the ECB, led by President Christine Legarde, could decide Thursday after a meeting in Frankfurt to also boost its “quantitative easing” asset-purchasing program to 40 billion euros ($22 billion) a month from the current pace of 20 billion euros.

Further, we have seen the Reserve Banks of Australia and Canada slash their cash rates in an effort to support their local economies. Australia has also announced a significant stimulus package of $2.7B+ to support their economy. The same has been seen right here in Singapore, with the recent Budget unveiling significant support for local businesses to ensure that both the company and their employees can weather the effects of the virus. Singapore has also announced that they are not opposed to utilising further resources to support the local economy.

It’s no wonder that stock markets are gyrating wildly. However, we believe there is certainly hope for investors. Goldman Sachs is predicting an earnings recession in the U.S., which will be most severe in the second quarter of this year, to be followed by a swift rebound.

We remain very confident in the long-term story and fundamentals of major and Emerging Markets (EM).  We have had to make a choice on whether to revert to previous portfolio positioning, to input an entirely new model, or to use the current positioning. To move back to our previous weighting would have involved selling down holdings across fixed income and alternatives in order to buy equities, specifically in favour of developed equity markets, but the current market dynamics were not in favour of this. To create an entirely new model would have suggested that we had significant new news to consider the current positioning incorrect, which was not the case. Therefore, we have kept the current positioning, meaning that our equity exposure has been reduced a little in favour of alternative investments, traditional fixed income, such as government bonds, and cash.

Worries about balance sheets make sense just because of the virus, and we are paying close attention to companies within our client portfolios to mitigate this risk. The earnings slump may last only a matter of months, but that may be longer than a heavily indebted company can survive. The V-shaped recovery for profits and share prices could be curtailed by a wave of bankruptcies. Then there is the impact of the oil price decline, which will make it hard for many high-yielding borrowers in the energy sector. If they default, that will mean losses for their creditors, which could affect the entire credit market. Even the spread on investment-grade corporate bonds, as rated by Moody’s, has shot up in recent weeks.

We recognise the short-term pain and the need to protect the downside risks, but we also believe this volatility will create opportunities, once there is clearer indication that the COVID-19 virus is being contained, and the Saudi/Russian squabble over oil strategy is resolved.

Goldman Sachs’s chief U.S. equity strategist, David Kostin, predicts a huge V-shape for the stock market over the course of the year. The S&P 500 is now at 2,741 (though June futures plunged a further 4.7% to 2,600 in Asian trading after President Trump announced restrictions on travel from Europe). Kostin predicts a mid-year level of 2,450, making this a real bear market; and then a recovery to 3,200 by the end of year. That would be a 32% increase from the trough.

In the meantime, we are working hard for our clients on a number of fund strategies to buy once we hit the peak of fear.

We will continue to keep you updated throughout this volatile period. If you have any questions at all, please do reach out to us.

Bruce Barron

Chief Executive Officer

Written by Bruce Barron
This article aims to provide information, Global Financial Consultants Pte Ltd is a Licensed Financial Advisor and is regulated by the Monetary Authority of Singapore. MAS License number FA100035-3