Looking through volatility

Articles 9/03/2020

The media hype around Coronavirus has the average Australian believing the situation is so dire that we need to rush to our local Coles and Woolies and fight tooth and nail for a roll of toilet paper. While this may be an overreaction, there are (and will be future) economic impacts felt both here and around the globe. 

While the impact of the Coronavirus remains to be seen, uncertainty has translated into market volatility. 

The increase in volatility has been magnified by the market's starting point, of higher valuations supported by a low interest rate environment. Until markets have a greater understanding of the extent to which the Coronavirus will impact economies, we expect continued price volatility, especially as more information and misinformation comes to hand.

In an age of real time information via the electronic media, where reports are often not verified, it is very easy to be misled. The need for drama will often frame news headlines.  We will hear about the value wiped from markets without a look through what is really going on. 

We have seen the beginning of a coordinated monetary and fiscal policy response around the world. Central banks have pulled the interest rate lever and Governments have committed to stimulus. In the background great medical minds are toiling away developing vaccines and treatments.  

What are we doing? How are we positioned?

While we expect Coronavirus to have a real economic impact and to influence the profitability of many businesses, it is important to not lose sight of our long term investment objectives.  

While events like this are impossible to predict, what we can be doing is making a call on market valuations and hopefully softening potential impacts on clients. Over the past year we have been actively reducing our exposure to growth assets as share price movements have not been driven by growing profits. 

While the psychology of markets never gets easier, we are pleased that portfolios are reasonably well positioned considering:

  1. High levels of cash - Individual client portfolios target a minimum level of liquidity so that they can continue to achieve their objectives without having to sell assets at inopportune times. In addition, we have tactically built cash levels further to be able to take advantage of potential market volatility, allowing us to buy assets at more attractive valuations.
  2. High levels of capital stable investments - We have taken a low risk approach to fixed income exposure, focusing more on the importance of capital stability than chasing income. In periods such as this, a good proportion of your capital remains available.
  3. Holding quality assets - A key consideration in portfolio construction is the quality of the investment.  Over all asset classes we overlay a quality filter. We believe that client portfolios are of greater quality than 'the market'.  While earnings expectations in the short term may be lower, we believe the value of our investments will remain intact over the medium to longer term.
  4. Tactical asset allocation - We manage client portfolios around agreed long term asset allocations. However, in the short term, we overlay a tactical view that reflects what is happening in markets. Going into this period, we have been underweight the more volatile asset classes. 

While investment valuations have generally pulled back towards more acceptable levels, we remain happy holding higher levels of cash and defensive investments, expecting the real impacts will not be known for a sometime. Importantly, when we are happy to re-enter markets we have the liquidity to do so quickly. 

Every Redwood client is different and managed to their unique circumstances. There are a number of factors considered (including risk, capital requirements/additions, time horizon, tax etc) for each client that filters into the management of their bespoke portfolio. This may mean that the action we are taking for some is different.

Redwood are constantly reviewing new information about Coronavirus, distilling the potential economic impacts, making decisions and ensuring those are tailored to each individual clients' circumstances and effectively implemented. Should you have any concerns please call to discuss. 

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