The world has been coming to terms with the implications of the coronavirus for some weeks now, but it was only towards the end of last month that we experienced the level of volatility we would expect in equity markets given a crisis of this scale. So why were equities complacent in the face of a potential pandemic, why have they suddenly woken up to the threat, and what is the longer-term outlook as a result?
The fact that equities were slow to react to the potential threat of coronavirus could have been because investors were struggling to find value and safety in bond markets – traditionally the place to shelter from volatility in equity markets. The absence of a suitable, less risky alternative investment was forcing investors to adopt a ‘wait and see’ approach.
But underestimating the coronavirus was always going to be a risky strategy. Given that one of the world’s largest and most important manufacturing economies (China) has practically ground to a halt, it stands to reason this will ultimately feed through to global quarterly business results. Companies less able to cope with changes in supply and demand could well fall victim to this crisis, and there are highly indebted businesses (thanks to years of cheap lending) that rely on a buoyant economy to maintain their balance sheet. We’ve not yet felt the full impact of the coronavirus, but we will, and we need to be prepared for it. As businesses report their earnings in the coming weeks, it could make for some testing times.
The Sanlam view
A global health crisis reminds us that the economy is susceptible to forces outside of normal economic cycles and government interventions. We’ve been constantly re-evaluating our exposures to every company, country and sector since this virus surfaced, and we will continue to do so. Our investment approach aims to protect our clients’ capital as much as it aims to grow it. Our focus is on resilient businesses with strong balance sheets that are well positioned to cope with an economic downturn and/or an inflation shock.
Of course, all companies can be swept along with short-term negative sentiment, but we’re confident in the longer-term outlook of our portfolios and the fact we’re well positioned to take advantage of any volatility and opportunities as they arise.
More importantly, though, we continue to hope that coronavirus is quickly brought under control, along with the human cost of this crisis, which ultimately matters more than any short-term economic woes.
“The coronavirus clouds what is otherwise a positive economic outlook. We expect around six months of weak and possibly negative economic growth in some regions. But a recovery should follow, bringing high levels of employment and consumer confidence.” - Philip Smeaton, Chief Investment Officer
Investment view: the power of infrastructure spending
In times of recession or slow economic growth, governments are known to step in with a raft of infrastructure spending to create jobs and give the economy a much-needed boost. So, when Boris Johnson announced that ‘HS2’ would proceed, he did more than agree to the completion of a high-speed rail project. This was a clear message that the newly elected UK government was ready to spend their way to a post-Brexit economic recovery.
Large, government-backed infrastructure projects can often become attractive investment opportunities. While it might take several years to realise the full return on the investment, those who are patient and have the foresight to invest in the future can be rewarded with stable, and almost guaranteed, income and capital growth.
Off-shore wind farms are a great example of this. Thanks to government funding in the development of new technology several years ago, the UK is now a market leader in offshore wind farms. Government subsidies are no longer needed because the scale and efficiency of wind-produced energy holds up on its own. But the initial fiscal support has meant that the UK-based manufacturers of this technology now have a global market to tap into, and the investors who backed them will reap the rewards for years to come.
Backing the right infrastructure projects in their infancy is easier said than done, so having government support is a good indicator of the impetus behind any future success. Alongside the HS2 announcement, for example, the UK government also announced its support of phase 2 of a project called Gigastack. This project aims to find a way to harness off-shore wind energy and turn it into hydrogen, providing energy-intensive industries and transportation with ‘clean’ renewable hydrogen. Not only will this support the UK’s 2050 net-zero greenhouse gas emission target, but it should mean that the UK companies at the forefront of this technology will help other countries achieve their targets too. For those willing to invest in the early stages of these initiatives, the longer-term potential is extremely attractive.
UK infrastructure priorities
Nationwide full fibre broadband by 2033
Half of the UK’s power provided by renewables by 2030
Three quarters of plastic packaging recycled by 2030
£43 billion of stable long-term transport funding for regional cities
Preparing for 100% electric vehicle sales by 2030
Ensuring resilience to extreme drought through additional supply and demand reduction
A national standard of flood resilience for all communities by 2050
Source: National Infrastructure Commission