Buying when others are selling

Has investor pessimism gone too far?

16 April 2020

While markets have suffered greatly during the global lockdown, we believe investor pessimism has gone too far and have redeployed cash to seek out new investment opportunities.

Our Chief Investment Officer discusses the continuing impact of the coronavirus and recent changes in portfolio positioning.

The current landscape

Large chunks of the world economy have been put into lockdown to allow society to fight the coronavirus. This has had some extreme effects on the global economy and on the markets over the past month. Should government containment efforts succeed, the big problem facing the authorities next will be understanding how to wake up those parts of the economy without letting the outbreak re-emerge.

Looking ahead, on a six-to-12-month view, we expect stocks, credit, and some of the more economically-sensitive parts of the capital markets to be a lot higher than where they sit today. As a result, we have been deploying cash where investor pessimism has gone too far and assets have been oversold to attractive levels.

As ever, we recommend investors get invested, stay invested and stay diversified.

Buying when others are selling?

As part of our aim to keep clients informed of our current investment views and how these themes are impacting your discretionary portfolios, Phil Attreed, Head of Investment Consulting, talks to Will Hobbs, Chief Investment Officer, about the continuing impact of the coronavirus and recent changes in portfolio positioning.

Phil: Hello and welcome to this April's edition of Monthly Market Insights. I'm Phil Attreed, Barclays Head of Investment Consulting, and I'm joined by the familiar face of Will Hobbs, our Chief Investment Officer. As you can see, we're filming from our respective homes this month, as we like many of you have adapted to working and living in new ways, embracing the technology that's available to us to allow us to continue to operate, well frankly, as normal actually. So Will, we’ve come a long way since we recorded last month's edition, lots of movements in markets. I'm not going to suggest that we relive some of the headlines, a lot of people have been very close to the news flow. What are the big takeaways for you from an investment perspective over the last month?

Will: Well, Phil you're right. It's been a bit it's a very hard story to tell in a very short space of time. If you wanted to tell it in a picture, the picture I'd probably pick would be that US unemployment claims chart, which really just shows just what a staggering full stop the world economy, or at least large chunks of it have been put to sleep, put into an induced coma for a while to allow society to fight the coronavirus. And this is having some extreme effects on the economy and it's had some pretty extreme effects on the markets as we've seen as well. In fact we would argue that markets have gone too far, but it has been an incredible month.

Phil: It was quite an unsettling month of March for investors, Will, and I suppose diversification though when we're looking at things, did play its part, including for us holding some US dollars in our portfolios. And the last couple of weeks we've seen some subsequent bounces in some of the riskier assets that we hold within portfolios as well. So where does that leave us with regard to coronavirus developments and what happens next I suppose, the big question for many is: are we seeing tentative signs of coming out of that from a markets’ perspective or are we just in the eye of the market storm?

Will: It's so difficult to tell Phil. I mean that's the real problem. We can certainly say that the fight against the coronavirus is pretty young, but the market reaction is likely quite a bit older. That's what you tend to find with markets: they tend to be pre-emptive, they predict what's coming and then make adjustments as new news comes in to help fill in the blanks a little bit. We know a little bit more than we knew, so we know that containment works. The big problem now for authorities really, assuming that containment continues to work, is how do you wake up those parts of the economy you've put to sleep without letting the outbreak re-emerge. That's really challenging policymakers right now and it's not like they've got much of a playbook to operate from. You're really finding that policy decisions are being made, fed by real-time research which is an interesting situation we're in. So Phil, we remain comfortable saying that on a 6-to-12-month view there are simply more scenarios where stocks, credit, some of the more economically sensitive parts of the capital markets complex, they’re a lot higher than where they sit today, that's just based on an assessment on the most likely outcomes for the economy over the next 6-to-12 months.

Phil: Thanks, Will, reassuring. But when it comes to what we're likely to see over the next few weeks and months, and particularly looking at data, you mentioned it just briefly there earlier on about the US employment data that was pretty staggering last week by all accounts and the second week running. We're likely to see data and headlines around the data continuing to fuel nervousness over the next few months. But to some degree are we not already expecting some of that and how markets price in that news?

Will: Because there's no real precedent for this, in a way, you've seen demand shocks and supply shocks all sorts of things before, but what you're really having here is a deliberate full stop in the economy. Now the problem with the employment data that you're looking at particularly, the thing that is really concerning for us, is obviously that the axe is falling hardest on the least economically secure parts of society, leisure sector workers, tourism-related employment, those things and so that’s really the alarming bit. On the more positive side, I guess, what you could say is that if policymakers manage to keep a lot of the businesses they're trying to keep on life support at the moment, if they manage that successfully over the next couple of months, then a lot of those jobs will be immediately available again as soon as containment is over. But like you say, the problem with economic data for the next couple of months is: we know it's going to be awful, we know that it's going to be record-breakingly awful in some senses. But for investors, markets have already moved a long way to try and anticipate that. So you may not find that new bad news actually receives a negative market reaction. In fact a couple of weeks or a week ago we found that that awful unemployment claims data coming out and markets actually rallied on the news because already worse was anticipated.

Phil: And I've heard you mention several times, Will, speaking to our own colleagues that we often see markets pricing in the recovery while we're still actually seeing bad news emerge with regards to events like this and looking back at more historic episodes like this for markets.

Will: Yes, that’s correct. That’s tended to be the case before and so I think you've tended to find that markets have peaked around about on average in the US, I think, looking at NBER Recessions (National Bureau of Economic Research Recessions) the conclusion was that stock markets peak about eight months before on average the recession begins and are back to where they started eight months after the recession has begun. So you can find that the bottom in stocks quite a lot of the time is really just when the news is starting to get bad. That's the difficulty in a sense, buy low, sell high sounds easy and sounds intuitive, but that means selling what everything looks good and buying when everything looks terrible.

Phil: It's always been a difficult task but with that actually, and finally, with the heightened market movements that we've been seeing as I said earlier across different risk assets, the Asset Allocation team, who work for you, they've been incredibly busy particularly on the tactical part of our portfolios, hopefully taking advantage of some of the valuations of those assets that we've seeing of late, do you just want to run us through some of the changes or thinking behind that?

Will: Yes. The thing that we've had is for the last six or so months or more in fact, we've been building up a store of cash in our tactical portfolio and really this was because some of the areas where that cash was being deployed previously, I mean parts of the fixed-income complex, even parts of equities, we just saw as too rich. And so we built up cash really for an opportunity just like the one we're seeing right now. So we're using that cash to deploy into assets where we see the pessimism has simply gone too far. And that's not unusual in these circumstances. What you tend to find when markets are falling very fast is that investors are really struggling to put an appropriate weight on what's called the left tail risks, serious, horrible economic outliers, depressions, bank runs, all those kind of things. When you're struggling to put a weight on it or when you're in an unprecedented situation and markets are in free fall, you can find that the weight assigned to those left tail risks gets too large. We are finding that at the moment and that is really what we're trying to take advantage of, a little bit of excessive pessimism implied in market prices.

Phil: Thanks Will, useful insights as always, particularly given these challenging times. That just leaves me to thank you, our viewers for joining us for this Monthly Market Insights. If you would like some more insight in between now and next month's edition, please do seek out and subscribe to our Word on the Street podcast. We'll provide some details of that at the end of this video clip so that you can subscribe to that. Otherwise we look forward to you joining us again next month.

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