In today's piece I explain how I arrive at the title "2020: The Year of Covid-19" and discuss some investment themes.
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As we navigate these uncertain times, I find it useful narrowing down potential outcomes through the process of elimination. What assumptions can we make with reasonable confidence? I have been quite vocal about my market views since the start of the year, partly because I believe now more than ever investors are susceptible to making mistakes, or worse, having their nest eggs mismanaged by others. I have seen this most explicitly in the case of clients that were invested in what they believed to be “balanced mandates”. Hundreds of billions worth of funds that have been generating 5-7% per year for the last 5 years only to drop 20-25% in the space of a month. Many of them are still down 20% from their highs in February. You don’t need to be a professional to understand that losing 5 years’ worth of gains in a month is unacceptable. Particularly when you are not defined as a risk-seeking investor.
So, in today’s piece I will be discussing 2 things: 1) How I arrive at the title “2020: The year of Covid-19, and 2) some themes and investment opportunities. First, let’s get back to defining the range of potential outcomes from both a market and outbreak perspective:
There is nothing particularly new about my view on timing, but sticking to how I believe the various game-changers (see previous articles) are likely to play out I think a rational way to define the range is as follows: Best case we are back to normal in 3 months – that is certainly not base-case, as it would require what most consider a medical miracle. Worst case things are back to normal in 18 months (even the most pessimistic individual would argue against a vaccine still not being available at that point). There are obviously factors that influence this range (testing, treatment, seasonality, change of habits such as social distancing) but none of these factors alone would result in a comprehensive return to what we perceive as “normal”. If one had to go out on a limb a pragmatic range would probably be 6-12 months.
Put simply: 2020 is likely to be the year that is largely defined by Covid-19. While it is almost certain that the current lockdowns will end, it is as likely that they will feature again. I believe it is almost inevitable that 2020 will be a year of start-stopping, i.e. interrupting lockdowns long enough to preserve people’s sanity and give the economy a proverbial hit of oxygen, but keeping these breaks short enough to control the pandemic.
From that I deduce that it is still extremely unlikely that we have an aggressive V-shape recovery (which is still being touted by many). I am constantly hearing that the market has priced in all the damage and that we should be fully invested at this point; yet at the same time negative economic data or guidance on certain companies still causes surprises (despite the actual news being completely obvious at this stage). This leads me to believe that investors banking on this outcome are likely to be disappointed. That is not to say that one can’t pick outperforming stocks, or that we won’t see general rallies, but this notion of the market getting back to where it was in February (S&P500 at 3400, FTSE100 at 7600) within a few months, or even in 2020 is ill-founded in my opinion.
At some point this crisis will conclude and we will move on to the next phase; and that is assessing the extent of the economic damage. Global economic recession is all but inevitable now, but the extent of that recession is entirely dependent on the number of months required to return to normality. In that context the next 3-6 months are crucial in terms of defining visibility. They are also an extremely difficult time to invest. Here are a few themes I can suggest (many of them are repetitions from previous commentaries which are starting to prove successful):
Don’t try to time the bottom – get comfortable with some volatility and invest in quality names that can whether the storm. Don’t be disappointed if you miss some of the upside, and don’t be discouraged if you have short term setbacks. Those waiting for us to re-test the March lows may end up left behind.
Don’t go for a binary outcome. In other words, do not 100% allocate to equities. As tempting as it is to buy stocks at these levels, you are potentially jumping the gun. That is fine if you have the stomach for it. It may well work over 2-3 years, but it is far safer averaging in gradually and keep some powder dry. As I have said before, I personally don’t think we will re-test the lows we’ve seen (2200 on the S&P) but that doesn’t mean we won’t have sell-offs from time to time.
Take advantage of higher levels of volatility, which are dropping by the day. I have personally, and on behalf of clients, sold large quantities of volatility on both indices and individual stocks over the last few weeks. Volatility is likely to remain elevated (10-20 on the VIX is a thing of the past) but we are seeing a fairly consistent downward trend from the highs of 84 (see accompanying image). Going back to the theme of process of elimination – I am quite comfortable taking the view that the VIX is unlikely to return to 80 based on the amount of stimulus that has been added to the system.
If you believe the worst is over, but the market is unlikely to go on a wild 1-way bull run over the next 6 months then you are best off with option strategies that limit your upside, but offer a huge amount of downside protection (for example earning 10% per year while being protected against market drops of 40-50%). These types of structures are viable again for the first time in years. Selling volatility through such strategies is particularly effective currently.
If you are a conservative investor, then you should not over-expose your portfolio to high beta stocks, however you should also no longer be satisfied sitting entirely in cash. The market has stabilized a lot and it is now possible to earn returns of 5-6% over 6-12 months with extremely low risk of capital loss.
As usual I am happy to discuss more tailored recommendations based on specific risk profiles on a case by case basis. I am also happy to discuss my own positioning in more detail.
2020: The Year of Covid-19
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As we navigate these uncertain times, I find it useful narrowing down potential outcomes through the process of elimination. What assumptions can we make with reasonable confidence? I have been quite vocal about my market views since the start of the year, partly because I believe now more than ever investors are susceptible to making mistakes, or worse, having their nest eggs mismanaged by others. I have seen this most explicitly in the case of clients that were invested in what they believed to be “balanced mandates”. Hundreds of billions worth of funds that have been generating 5-7% per year for the last 5 years only to drop 20-25% in the space of a month. Many of them are still down 20% from their highs in February. You don’t need to be a professional to understand that losing 5 years’ worth of gains in a month is unacceptable. Particularly when you are not defined as a risk-seeking investor.
So, in today’s piece I will be discussing 2 things: 1) How I arrive at the title “2020: The year of Covid-19, and 2) some themes and investment opportunities. First, let’s get back to defining the range of potential outcomes from both a market and outbreak perspective:
There is nothing particularly new about my view on timing, but sticking to how I believe the various game-changers (see previous articles) are likely to play out I think a rational way to define the range is as follows: Best case we are back to normal in 3 months – that is certainly not base-case, as it would require what most consider a medical miracle. Worst case things are back to normal in 18 months (even the most pessimistic individual would argue against a vaccine still not being available at that point). There are obviously factors that influence this range (testing, treatment, seasonality, change of habits such as social distancing) but none of these factors alone would result in a comprehensive return to what we perceive as “normal”. If one had to go out on a limb a pragmatic range would probably be 6-12 months.
Put simply: 2020 is likely to be the year that is largely defined by Covid-19. While it is almost certain that the current lockdowns will end, it is as likely that they will feature again. I believe it is almost inevitable that 2020 will be a year of start-stopping, i.e. interrupting lockdowns long enough to preserve people’s sanity and give the economy a proverbial hit of oxygen, but keeping these breaks short enough to control the pandemic.
From that I deduce that it is still extremely unlikely that we have an aggressive V-shape recovery (which is still being touted by many). I am constantly hearing that the market has priced in all the damage and that we should be fully invested at this point; yet at the same time negative economic data or guidance on certain companies still causes surprises (despite the actual news being completely obvious at this stage). This leads me to believe that investors banking on this outcome are likely to be disappointed. That is not to say that one can’t pick outperforming stocks, or that we won’t see general rallies, but this notion of the market getting back to where it was in February (S&P500 at 3400, FTSE100 at 7600) within a few months, or even in 2020 is ill-founded in my opinion.
At some point this crisis will conclude and we will move on to the next phase; and that is assessing the extent of the economic damage. Global economic recession is all but inevitable now, but the extent of that recession is entirely dependent on the number of months required to return to normality. In that context the next 3-6 months are crucial in terms of defining visibility. They are also an extremely difficult time to invest. Here are a few themes I can suggest (many of them are repetitions from previous commentaries which are starting to prove successful):
As usual I am happy to discuss more tailored recommendations based on specific risk profiles on a case by case basis. I am also happy to discuss my own positioning in more detail.
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