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Q1 Investment Market Commentary

Paul Harwood reports on the end of a 43 quarter run of uninterrupted growth in the global economy.

The first quarter of 2020 will be remembered as the ending of the longest bull market in history. The road to recovery from the great financial crisis in 2008 has not been without obstacles but where the European sovereign debt crisis, commodity price crash, Chinese devaluation and trade wars all failed – Coronavirus will bring an end to the 43-quarters of uninterrupted growth in the global economy.

The word ‘unprecedented’ has been used a lot in recent weeks, and for good reason. The way that the virus has disrupted life as we know it, the scale of central bank and government intervention, the pace of the market decline and its subsequent rebound all fit the word aptly. Still, I would resist the temptation to say ‘this time is different.’ The causes of financial crises tend to differ as it is never the risk you are aware of that turns out to be the black swan. In this case, it is a public health crisis that has spiralled into a financial one, but there are still many parallels that can be drawn thus far. This ranges from 9/11 in terms of the impact on global travel, the 1987 market crash regarding the swiftness of recent declines and even World War II with regards to scale of fiscal support from governments that has been – quite rightly – huge.

Then there is the great financial crisis of 2008 where the bursting of the house price bubble exposed the vulnerabilities of a then highly-leveraged banking system. While the seeds of the crisis were sown from within the financial sector itself, the outcome is not so dissimilar to today in terms of the sudden shock it has rendered on the global economy. Fortunately, it appears that central banks and governments have remembered their lesson from the last crisis in that they must act fast and act big.

Our Response

We have been doing a significant amount of analysis in light of the new world that we are living in. First and foremost, existing holdings have been scrutinised with regards to the revenue shock coming their way, analysing their liquidity and debt (as well as the structure of that debt) and what operational levers can be pulled to take cost out of the business. Where there was insufficient ‘margin of safety,’ we have been quick to exit our positions in two travel & leisure names before seeing the worst of their falls in March.

As ever, we see very little value in trying to time market levels and making wholesale changes at this stage but that does not mean we aren’t preparing for the future. The resetting of markets that some might say was overdue presents an opportunity to reassess the world we are living in. We are thinking a great deal about the likely changes in business and consumer behaviour. One we feel quite confident about is the acceleration of digitalisation in our economies. Trends such as e-commerce, network infrastructure, robotics & factory automation, virtual entertainment, cloud computing and the need for data centres all feature in our longer-term thinking.

We have not been immune as many companies have suspended their dividends in recent weeks. We recognise that the greatest contribution to returns over the long term is dividend income and importantly, the reinvestment of that income over time. This is a key part of our investment philosophy and our process is unchanged. We continue to favour companies with long-term structural growth drivers, which generate returns on invested capital over their cost of capital and have scope to grow their dividend while also reinvesting for future growth. This ‘compounding’ of returns over time matched with the balance sheet strength to navigate challenging times should continue to be positive for shareholder wealth over the long-term.