Our investment team has remained fully operational during the coronavirus crisis to diligently apply their collective experience and individual expertise to weather the stock market storm. This means securing our portfolios against the recent gales, while positioning them to generate the best possible returns when the clouds fade and conditions begin to normalise.
The last six weeks have seen a series of historic market movements as the coronavirus has rapidly spread and quickly developed from a health crisis into an economic and financial one. The S&P 500, for example, lost a third of its value in little over a month – its quickest collapse on record – before delivering its best three-day return since the end of the Great Depression.
Stocks cheap(er) but risks remain
Despite the recent bounce, stocks generally look fairly valued with the MSCI AC World Index trading on a forward P/E of 12.9x. That equity markets have fallen by over a quarter from their February highs but are valued only slightly below their 10-year average (13.2x) underlines how rich stocks had become ahead of the crisis and that investors still need to be selective. Indeed, multiples are likely to expand once more as earnings estimates will undoubtably fall significantly in 2020.
While many institutions are adding equity exposure following the correction, some markets remain relatively expensive, particularly in light of the economic uncertainty ahead. The S&P 500, for example, currently trades on a cyclically adjusted Shiller P/E Ratio of 24.9x which is higher than its historic average of 17.0x and more than double the 11.7x at the depths of the global financial crisis. With markets also susceptible to further dips on negative coronavirus developments along the road to recovery, a solid understanding of companies and the risks they face is likely to be more important than ever.
To this end, we have recently added a few defensive companies to our portfolios, including a telecom business in Asia and Europe and a US-based media and home entertainment group, both of which have resilient business models which are well-suited for the current environment. We look forward to sharing more details of our new investments in our upcoming first quarter reports.
The other benefit of our active approach in the current environment is that we can selectively add quality companies that should outperform once the economic picture becomes clearer and market sentiment improves. While it would be unwise to predict exactly when this will materialise, the encouraging PMI data from China this week is a positive indicator as to how quickly economies could potentially rebound. The funds' broad mandates, which enable them to select the strongest companies from around the globe at prices previously out of reach, are of clear benefit to clients, in this respect.
Some of the more offensive companies we have recently added at attractive valuations are from the energy and mining sectors plus a US financial services group with lower direct exposure to sectors most at risk from an economic slow-down.
Volatility opportunity
Reflecting investors' panic, the VIX Index of market volatility recorded its highest ever reading during March, a month which included both the S&P 500's largest daily percentage loss since Black Monday and its biggest gain since 1933. We have examples in our own funds of companies which have experienced dramatic intraday swings of 20+ percentage points, providing trading opportunities for an active investor.
An easier prediction is that markets will remain unstable until coronavirus cases hit their own peak and while I understand this volatility can be unsettling for clients, it provides clear opportunities for stock-pickers. We have the added benefit in SKAGEN of running concentrated portfolios, making them easier to monitor and we have taken advantage of recent share price spikes to sell positions and help secure our funds. A good example is the US supermarket chain Kroger, which has gained 50% in recent months to achieve our target price faster than we originally expected.
We also have a large library of company research built up over many years, on previous holdings and investment ideas that can be brought into the portfolios if the price is right. Our funds are highly liquid and / or have plentiful cash available so are well-placed to capitalise on favourable market movements.
Rather than being at the whim of market events like passive investors, many of whom are over-exposed to unappealing old-world stocks in the indices they follow, I am comforted that we have control over our own destiny and can be proactive in managing our funds. As well as being highly selective, our long-term investment horizon means we can focus on company fundamentals and catalysts, rather than short-term market noise. By remaining disciplined and true to our active approach, I am confident that the hard work we have undertaken during the market turmoil will pay off.