Dynasty is deeply aware that Covid-19 is essentially a humanitarian crisis. Due to extensive media coverage on the human, social, scientific, and statistical aspects of the virus, we thought it would be informative, in the capacity of the custodians of our clients’ wealth, to run a weekly series covering the economic and investment impacts of the Coronavirus, particularly as the crisis has caused a sharp fall in asset prices, both locally and abroad. The limited scope of these articles does not diminish the emotional marking of our team, as we contemplate the plight of so many corporates and individuals who are far less fortunate than ourselves.
For up-to-date statistics on the total number of Covid-19 cases, recoveries, and deaths globally, access this interactive map.
1. Record-Breaking Milestones for the S&P Index:
Since February 19, this Index has experienced the quickest 30% decline ever recorded, taking just 22 days to plunge. On the positive side, the Index has experienced the largest three successive day gains since the Great Depression of 1929, posting returns of 9.4%, 1.2%, and 6.2% on the 24th, 25th, and 26th of March, respectively.
2. Market Volatility and Market Timing:
The view of the Dynasty Investment Committee is that the current relief rally in equity markets will probably not be sustained, as the extent of the economic fallout from Covid-19 is impossible to quantify this stage, especially the impact on corporate earnings which will only be apparent when Q2 reporting takes place. However, being absent from equity market upturns also has its pitfalls, especially with the extent of stimulus being applied globally. The table below shows the dramatic negative impact on returns in various decades, through missing out on the ten best days in each illustrated period.
3. Directionality of the Rand:
The rand has weakened by approximately 27% against the USD year-to-date. A question frequently posed to us is whether we see the rand strengthening or weakening from its current rate at R17.80/USD. The article entitled ‘Rebalancing likely to keep the Rand from Strengthening’ sourced from our research partner Analytics Consulting, explores the factors that are likely to keep the currency vulnerable in the short-term, especially factors such as Covid-19, associated nervousness across emerging markets, and the rebalancing of the global bond index at the end of April when foreign investment outflows will take place following last Friday’s downgrade by Moody’s. However, on a longer-term basis and looking through the Coronavirus crisis, the rand could well strengthen if the disease becomes less of a factor. The chart in the article shows the rand being 25% to 30% undervalued at present. Dynasty’s conclusion is that unless there is urgent economic and fiscal reform, the currency will remain structurally weak and continue to trade at a discount (albeit narrower), to fair value.
4. Dynasty’s Quality Bias as a Risk Mitigation Strategy:
For several years Dynasty has embedded the quality style of active management to complement the broad index trackers (‘passives’) in our equity portfolios. In this sense ‘quality’ is defined as globally diversified companies that generate high levels of free cashflow; with strong barriers to entry; have strong balance sheets; a global brand presence; sustainable earnings growth; and operating in typically defensive sectors.
Quality is in our view more important than ‘value’, as quality style managers will also seek to identify companies with strong earnings growth, which implies that these companies will tend to become more valuable in the medium-term. They would rather pay-up for such companies in preference to buying cheap companies where the long-term success is less certain or where such companies are exposed to cyclical sectors. By implication, these quality managers tend to avoid energy, banking, and resource/mining shares.
During 2019 we also introduced quality tracking instruments into our portfolio construction, which mechanistically replicate the quality style of our actively managed components. Our aggregated quality bias has served clients well during the Coronavirus equity market crisis of February/March, with performance drawdowns on these instruments/funds being significantly less than benchmarks.
5. Coronavirus – The End of The Beginning
In a fascinating podcast entitled Coronavirus: The end of the beginning, BBC’s Christian Fraser interviews Investec Global Investment Strategy Group Chairman, John Haynes, and Investec Wealth and Investment’s Chief Investment Strategist, Chris Holdsworth about how financial markets – both global and South African – are responding to the Covid-19 crisis. Hopefully, you will find the time to listen to this lengthy (32 minute) podcast which includes: how the first part of the crisis could be behind us, but that news is going to get incrementally worse; yet markets are starting to trust the responses from central banks and are ‘beginning to look for opportunities rather than risks’; government revenue systems are transitioning to redistribution systems and this is unprecedented; the extent of negative impact on Q2 economic growth which will be worse than the Global Financial Crisis of 2008/2009; how weak economies will lead to deaths from other causes; how global forces are shifting; and the importance of science in fighting the disease.
6. Dynasty’s Response to the Coronavirus Crisis:
Policymakers and governments across the world have imposed varying degrees of social distancing, social isolation, quarantining, and economic lockdowns in an endeavour to arrest the spread and impact of Covid-19. These measures are unprecedented and have had a devasting impact on our modern, globalised economy. In the face of these developments, it cannot be ‘business as usual’ for our Investment Committee. Our response is to challenge certain maxims (viz asset allocation) and to revisit every passive and active component within our portfolio construction. With reference to the latter, we are currently intensively engaging with each of our underlying managers, both verbally as well as in writing.