By Kevin Wong, Senior Portfolio Strategist
Just a few weeks ago, someone commented that it was amazing that he could experience a crisis at such an early stage of his career. I was a little older than him when I experienced my first crisis. For those that went through the crisis of 2008, the current situation would have us reminiscing the hopes and despairs that came with such trying times. For some, it was the pain of making losses. For me, it was the missed opportunities.
Like many other investors, we entered 2020 with the optimism that a growth recovery is upon us. Subconsciously however, we always wondered when the economy would face the next downturn. The geopolitical tensions that occurred in the first week of January reminded us that negative black swan events can catch the complacent investor off guard. Whether it is COVID-19, or geopolitical tensions, they are similar in their nature of surprise; they only differ in the magnitude and length of the impact to economic growth. We were actively taking profits but with the power of hindsight, we can only wish that we had raised even more cash prior to the volatility. That’s history of course.
What is the way forward now? I’m not about to start a debate about where is the market bottom or what shape of a recovery we are likely to see. Regardless of the answer to those questions, I prefer to focus on the longer-term investment themes. There will always be companies that will rise to the challenge, recover and exceed their previous peak in revenue and earnings. It is also likely, that this is the same group of companies, whose equity prices have exceeded the highs of 2007. In 2008, we knew little of the companies that played into eCommerce nor did we have the fin-tech solutions that have dramatically changed our lives. That makes the investment themes that we can potentially gain exposure to even more exciting.
The point is, without this large reset, stocks that are expensive will rarely be bought. But this reset has brought most stocks back to a “level playing field” (except for those that benefited from the “stay at home” theme) – stocks that were cheap have remained cheap but it is those that were once too expensive to buy, that have become cheaper than history.
What are we doing for our clients? We see this reset as the opportunity to ask the important question: “how do you want your portfolio to look like in next 5 years?”. We have deployed a portion of our cash into high quality growth stocks during the recent lows. For the legacy positions, we are taking the opportunity to restructure and to move up the quality curve. We are also actively re-balancing the portfolio to include the investment themes that were previously missing. Bottom line, this is a great opportunity to be re-balancing and not a time to remain frozen.
