The Multi-Asset Process

March 2020 Market Review

Just over a month since the S&P 500 hit a record high on 19 February, the ongoing spread of Coronavirus, plus an oil-centred dispute between Russia and Opec, has seen markets tip into bear territory with growing fears about impending recession and around a third of the world currently in lockdown.

Amid huge volatility in stock markets, with some of the largest daily falls swiftly followed by large rallies, we have seen emergency policy responses from central banks in cutting interest rates and providing much-needed lines of credit and liquidity. With so many businesses threatened amid widespread lockdowns, we expect much more of this to come: on top of huge monetary stimulus, the US government has pushed through a $2 trillion fiscal package and this could ultimately total close to $3 trillion.

In the UK, meanwhile, the current support package, covering individuals, companies and banks, is already at considerably more than 50% of last year’s GDP.

Against such era-defining activity, the oil situation has been firmly in the background and yet its decline has been no less precipitous, hitting an 18-year low at the end of March at around $22.50 for a barrel of Brent crude. To compare, Brent was at $65 as 2020 began, but containment measures have caused demand to slump and severe disruption in supply chains, on top of a price war launched by Saudi Arabia as talks with Russia over price stabilisation broke down.

If the Saudis and Russians follow through on threats to unleash record oil supply next month, experts say energy markets will have to brace for another plunge in prices, with estimates suggesting another 20% fall could be on the cards.

Looking to the next few weeks and months, there remains a huge amount of uncertainty and it is imperative we avoid the panic that has overtaken markets. Without being flippant, this is not the end of the world and things will recover – market participants are currently attempting to bridge the gap between reality and perception when it comes to the ultimate impact on growth and the debate is already raging over U versus V-shaped recovery and other letters beyond that.

As expected, Coronavirus fears led to a collapse in sentiment over March and large-scale selling of equities, despite efforts by many fund managers – including us, here and elsewhere – to urge against panic and crystallising paper losses. Looking at Bank of America’s latest monthly Global Research Report, this backdrop has seen the largest ever monthly drop in equity allocations, with 35% of investors now underweight the asset class and many rushing wholesale into cash.

As we have written in recent weeks, however hard it might be, it is vital to avoid short-term mistakes that can potentially damage long-term wealth generation. This will be the fourth bear market of my investment career and while the catalysts are always different, there are clear similarities we expect to emerge this time as well: the difference to previous declines – which makes such reticence so hard – has been the speed, with the slowest bull run in history giving way to one of the rapidest bear markets.

It always useful to put dramatic, short-term events into a long-term perspective: economic conditions may change over time but the emotions of fear and greed are a constant factor in market moves. Over Monday 19 October and Tuesday 20 October 1987, for example, the FTSE 100 fell 23% as Black Monday hit, but over the subsequent five years, it produced a total return of 74.8%.

Equities rarely ascend in a straight line and successful investors know to expect corrections and bear markets on the path to long-term reward: the vital lesson is not to panic but to stick to your long-term portfolio strategy. Our focus remains on patient investing – the winning by not losing we talk about so often – and what that ultimately requires is the ability to look through short-term periods and keep faith in the long-term process.

In terms of our portfolios, we remain in close contact with our underlying fund managers and although they are all watching markets as we are, we are comforted – as odd as it might sound – that most are currently doing very little, at least in terms of buying and selling.

All our managers are selected on the basis they have successfully kept to a certain investment style over the long term and any sudden shifts in approach now would raise a serious red flag.

A number are keeping a decent level of cash so they can meet redemptions from investors who have pessimistic views but not so much that fund holders miss out on the days when the ‘selling panic turns into a buying panic’, as one of our managers commented. Warren Buffett, as perhaps the world’s most famous investor, is finding himself quoted more often than ever in these troubled days and his claim that ‘the best new investment idea is often to buy more of what you already own’ is likely to prove particularly apt for many of our managers over the course of 2020.


In terms of our own positioning, we have been neutral since October 2018 when we pared back our US equity exposure, favouring areas where we see the best value – namely Europe, Japan Asia and emerging markets. We have also maintained a weighting in bonds for diversification, with a bias towards credit and high yield, and alternatives via hedge funds and absolute return vehicles.

At any point in time, our tactical positioning ranges from one to five, with one the most bearish on markets and five the most positive. As stated, we have been neutral since 2018 and feel this gives us scope to take advantage of increasingly cheap equity valuations as we look forward.

To be clear, a risk grade 3 portfolio will remain risk grade 3 and so on. But each of our portfolios has a risk ‘budget’ (or volatility target) between certain levels and as markets begin to recover, we will increase our risk to the maximum level allowed in order to take advantage of potentially generational opportunities.

Coming back to that huge monetary and fiscal stimulus package, we would suggest trillions of dollars poured into the US might bring an end to recent dollar strength and a period of weaker greenback would potentially be positive for emerging markets.

Meanwhile, if we go back to a similar period of government largesse, in the wake of the Global Financial Crisis, a major fear was that quantitative easing would spark inflation but, ultimately, the forces of globalisation and technology were enough to keep it in check. Technology is now more embedded than it was then, however, and we might see companies increasingly eschew global supply chains and seek more local suppliers in a post-Coronavirus world, both of which would put pressure on inflation.

Widespread onshoring would also have implications for issues such as climate change, and these are all things companies – and, of course, our underlying fund managers – will need to consider when we finally come out of these challenging days and can start looking to the future. No one should forget that when we eventually emerge from this, we have the rigours of a US election and potentially a Brexit deal to worry about.

Buy low, sell high is one of the cornerstones of our strategy but data show the average investor continues to do the opposite. We feel the coming months will allow us to do exactly this while remaining within existing risk parameters and suitability requirements. We are not there yet but, looking back at this period in a year’s time, we would not want to rue missing a great opportunity to buy low.

In the meantime, we continue to urge everyone to stay at home and, in investment terms, stay the course.

For a comprehensive list of common financial words and terms, see our glossary here.


Key Risks & Disclaimer

Please remember that past performance is not a guide to future performance and the value of an investment and any income generated from them can fall as well as rise and is not guaranteed, therefore you may not get back the amount originally invested and potentially risk total loss of capital.

This content should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy.  It contains information and analysis that is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content of this document, no representation or warranty, express or implied, is made by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. It should not be copied, faxed, reproduced, divulged or distributed, in whole or in part, without the express written consent of Liontrust.

Monday, April 6, 2020, 12:10 PM