HL Multi-Manager update – investing through the market downturn

In recent weeks, governments have stepped up to the challenge of coronavirus. They’re offering fiscal as well as monetary support designed to prop up the economy, businesses and the public.

In the UK, as well as interest rate cuts, the chancellor has announced tax holidays for businesses and individuals, government-backed business loans, income replacement for businesses to pay employees, and mortgage holidays for home-owners and landlords. Further measures are expected too.

The final outcome remains uncertain, and lots of small businesses and highly indebted companies might not survive this crisis. But governments across the world are doing what they can. This is a more positive backdrop than where we were just a week or two ago.

As we collectively build knowledge of the virus, we’ll be better able to manage it and there will, no doubt, be a vaccine in time. One day in the future we’ll get to the other side of this pandemic and markets will normalise – but along the way there are ongoing risks. The virus might be under control but come back again in the future – causing another round of social and financial disruption.

There’s also a risk that the fiscal and monetary policies announced aren’t enough. While the headline packages look positive, the ability for companies to have access to the borrowing they need is still uncertain.

As a result, we don’t think the time is right to take too much risk when deciding the balance of our portfolios. As always please remember investments can fall as well as rise, so you could get back less than you invest. This article isn’t personal advice, seek advice if you’re unsure.

The beauty of hindsight

In the future, when we look back at markets today, it will be obvious what we should have done. Either we should have bought the dip – in which case we’ll say, “We knew that governments would act sufficiently to control the disease and markets would return to normal”.

Or we should have held off – in which case we’ll wisely reflect, “It was right to protect your liquidity, because a credit crunch ensued and many businesses faltered along the way, giving an even better entry point than March 2020. Anyone foolish enough to try and catch the falling knife just didn’t get the scale of the problem”.

But we don’t have a time machine, so we have to stick to our investment principles and analyse the current market against our long-term fair value assumptions.

What have we done in the portfolios?

We think capitalism will survive this crisis, and as such abandoning the market entirely will prove to be wrong.

A lot of stock markets look good value according to our analysis – Asia, UK, Japan and Europe – but the US is not in bargain territory. Bond yields have picked up, and are looking more attractive, but a yield of 3.5% for investment grade bonds is not high when looking historically.

So far we have increased our exposure to UK and Japanese equities by a small amount, but haven’t added significantly yet, as we’re waiting for a better buying opportunity.

We’re still cautious on bonds – since the downturn, investors have begun to question whether the higher yield adequately compensates them for the increased risk.

They also became fearful of businesses with a high level of debt, which might not survive even a short period of the economy being closed down. These include airlines, cinemas, retailers, restaurants and hotels. Generally the fear of banks or other lenders restricting who they loan to, or how much they loan, has worried bond markets.

This has meant bond markets have fallen – and it could well get worse before it gets better.

What next?

We’re still dealing with uncertainty and it’s very likely that markets will remain volatile for some time.

We’ll carry on managing the portfolios with a calm, long-term view. We’ll make changes where we feel they’re adding value, but avoid knee-jerk reactions and update investors with developments in due course.

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The HL Multi-Manager funds are managed by our sister company HL Fund Managers Ltd.