Coronavirus: a market and portfolio update

With the COVID-19 coronavirus outbreak stoking global anxiety and causing concern across financial markets, investors the world over have been shaken as the crisis escalates.

Candidly, there is much about COVID-19 we don’t yet know. How far and how fast will it spread? What is the mortality rate? Will a vaccine be developed soon? In addition to the human toll, we don’t know the impact the coronavirus will have on the global economy.

Stock markets hate uncertainty. Their knee-jerk response is the widespread, indiscriminate selling we have seen this week.

Safety comes from having a diversified portfolio.
However, it’s important to distinguish between the market sell-off and the impact on Newport’s portfolios, which are being cushioned by the following features:

• A high cash weighting (i.e. 15% of a balanced portfolio);
• 12 different asset classes – with just 40% of a balanced portfolio exposed to public markets;
• Yield investments (~38% of a balanced portfolio) – some of which benefit from the economic uncertainty (e.g. mortgages, real estate);
• Being underweight the most vulnerable stock market sectors, such as technology;
• Having independent managers of public equities who do not use leverage and own real businesses whose valuations they understand and feel comfortable with;
• Owning U.S. dollar-denominated assets – the traditional safe-haven currency in times of crisis

The market giveth. The market taketh away.
The tech darlings that drove stock market returns in 2019 are being hit the hardest and are now in full correction territory (i.e. >10% price decline). Partly because of supply chain disruption. Partly due to heightened recession fears. And partly because they were over-valued to begin with.

Our equity managers buy businesses, not stocks.
As EdgePoint, our global equities manager, wrote in a note this week, “there are very few things in life as uncomfortable as watching the price of something you own go down if you don’t know what the value of it is. Most people don’t know the value of what they own, so dread sets in.”

Please be assured that our equity managers do, very much, know the value of what they own. EdgePoint has earned its outstanding record by profiting when markets are “frozen with dread.” (They also take a skeptical view when they are “dripping with envy”, but that is for another discussion.)

Laurus, our North American equities manager, has a similar approach. In their note to us yesterday, they shared their tactics for the current environment: “…we will take opportunities provided by market volatility to trim exposures on stocks with full valuations, add more to stocks excessively beaten up by pessimism, and potentially add new names that decline into a favourable valuation range.”

Our current asset mix reflects a low-growth, low interest rate environment.
It should also be of comfort to know that tactically, over the past 12-15 months we have been “de-risking” portfolios. Meaning, we’ve reduced equity exposure. We’ve kept cash on the sidelines and added yield investments that offer better risk/reward. All with the aim of protecting portfolios on the downside. We anticipated a market correction was due. The timing and source were unknown.

Our Investment Committee met again this week to review our total asset mix. With interest rates headed lower, our mortgages, real estate and infrastructure holdings should benefit. With the Canadian dollar under pressure, the value of our U.S. and global real estate assets are enhanced. We feel comfortable with our diversified asset mix.

In summary, we have seen unexpected shocks like this in the past. From the 1973 energy crisis, to Black Monday in 1987, to the burst of the dot-com bubble of 2000 to 2002, through to the most recent financial crisis of 2008/09, we have managed through them. We know that opportunities surface in every crisis. We expect the coronavirus sell-off will be no different.