Time to invest with long-term perspective

With markets experiencing their worst falls since the global financial crisis, we believe focusing on long-term themes is more important than ever for investors.

Here we outline a pragmatic view of the current situation and how our investment philosophy enables a balanced and opportunistic response to market conditions.

Historic market context

The ‘black swan’ event of the coronavirus is bringing high risk of downside to the economic momentum globally, and therefore to corporate earnings in the short term. The magnitude of the downside risk is difficult to quantify at this stage, being dependent on how long and how severely the virus crisis is going to impact economic activity.

As a result of this fear and increased uncertainty, equity markets have significantly repriced globally from historically high valuations. However, it is worth considering this event in an historic context against other prominent market falls and the overall upward trajectory of share prices in the last thirty years.

LTU Factset chart

Immediate economic outlook

The impact of the virus is undoubtedly globally significant in the short term, constituting both a supply and demand shock at the same time.

Beyond China’s growth figures, which will be particularly badly hit, supply chains and global GDP will also be severely impacted, with Europe likely to suffer more than the US. At the market level, investors could remain in fear mode for a while.

However, this downward pressure in economic momentum is likely to trigger sizeable and potentially globally synchronized policy responses in the next 6-9 months to ensure the world doesn’t dip into a recession.

Central banks are on stand-by to act in an even more accommodative manner (and have in some instances already started to act), should economic activity suffer too much from the pandemic fear. We are also likely to see sizeable fiscal policy responses across key economies. Both of these could trigger a positive market response.

Market reaction

Markets are likely to remain in fear mode for several weeks. We predict 2020 will continue to be volatile given both the short-term headwinds to growth and earnings, and the likely supportive monetary and fiscal measures we might see.

There will therefore certainly be plenty for the short-term pessimists to focus on. Depending on risk appetite, the market may or may not be willing to look through the sizeable earnings downgrade risk and profit warnings coming up in Q1 and potentially Q2, possibly leading to the need to reduce 2020 estimates. In the coming months, it will be a period of hoping for economic activity to recover in the second half of the year.

We believe markets will bottom once evidence of policy response comes through, once pandemic threat eases (contagion risk plateauing, hopes of a vaccine fast-tracked to availability) and/or the short-term negative impact on economic and corporate activity is accounted for.

Portfolio positioning

Short-term investors will focus on the earnings downgrades to come at quarterly results, but for long-term investors such as ourselves, we see this period as an opportunity to buy more of the stocks that we like at more favourable entry points than previously.

Indeed, the portfolio’s investment horizon of five to ten years enables a sanguine and opportunistic response to exactly this type of event. A clear focus on quality businesses with strong balance sheets, pricing power, high returns and sustainable business models helps withstand short-term downward pressure, while accessing the economic benefits of longer-term growth themes.

We have identified three megatrends which we believe are going to be driving market dynamics across a range of industries, long after the current share price slump has passed: Demographic Change; the Future of Technology; and Resource Scarcity.

These are mega-trends that will remain relevant on a multi-decade perspective and we will therefore look to use this valuable time to invest in companies that are the long-term beneficiaries of these themes at attractive valuations. As long-term, research-driven stockpickers, this is how we use our investment edge.

Important Information

This information is issued and approved by Martin Currie Investment Management Limited (‘MCIM’). It does not constitute investment advice. Market and currency movements may cause the capital value of shares, and the income from them, to fall as well as rise and you may get back less than you invested.

The information contained in this presentation has been compiled with considerable care to ensure its accuracy. But no representation or warranty, express or implied, is made to its accuracy or completeness.

This document has been prepared for professional investors, it is intended for the recipient only and may not be distributed to third parties. The document does not form the basis of, nor should it be relied upon in connection with, any subsequent contract or agreement. It does not constitute, and may not be used for the purpose of, an offer or invitation to subscribe for or otherwise acquire shares in any of the products mentioned.

Past performance is not a guide to future returns.

Risk warnings – Investors should also be aware of the following risk factors which may be applicable to the strategy shown in this document.

The views expressed are opinions of the portfolio managers as of the date of this document and are subject to change based on market and other conditions and may differ from other portfolio managers or of the firm as a whole. These opinions are not intended to be a forecast of future events, a guarantee of future results or investment advice.
  • Investing in foreign markets introduces a risk where adverse movements in currency exchange rates could result in a decrease in the value of your investment.
  • This strategy may hold a limited number of investments. If one of these investments falls in value this can have a greater impact on the strategy’s value than if it held a larger number of investments.
  • Smaller companies may be riskier and their shares may be less liquid than larger companies, meaning that their share price may be more volatile.

For institutional investors in the USA:
> The information contained within this presentation is for Institutional Investors only who meet the definition of Accredited Investor as defined in Rule 501 of the United States Securities Act of 1933, as amended (‘The 1933 Act’) and the definition of Qualified Purchasers as defined in section 2 (a) (51) (A) of the United States Investment Company Act of 1940, as amended (‘the 1940 Act’). It is not for intended for use by members of the general public.

For wholesale investors in Australia:
This material is provided on the basis that you are a wholesale client within the definition of ASIC Class Order 03/1099. MCIM is authorised and regulated by the FCA under UK laws, which differ from Australian laws.