14 April 2020
By Ronan Kearney, Investment Manager DMS Verbatim Multi-Index Funds
March has been dominated by the incidence of Covid-19. Since 1926, there have been only 15 other instances where the US benchmark index was down 10% or more from Friday close to Friday close. In modern times last month’s market decline by 10%+ in a single week counts as the fastest ever. The volatility index known as the Vix recorded its highest ever reading during the rout. The market reaction to what swiftly became a pandemic has been brutal. We should always remember that markets are a discounting mechanism and this fact coupled with intangible aspects such as investor behaviour shows that equity prices very swiftly build-in assumptions about future earnings declines and GDP contraction linked to the inevitable population lock downs that followed. One acute area of concern was the potential for the market stress to overflow into the banking sector. As unemployment spiked on a temporary basis the impact to mortgage repayments and other personal loans became an acute concern. The combination of a massive coordinated stimulus programme provided by central banks and a series of fiscal measures offered by finance ministers helped to arrest the market collapse and provided a catalyst for an equity rally.
Based upon an investment philosophy of prudence and caution we have defensively positioned the DMS Verbatim Multi-Index portfolios during the build-up to March – not through perfect foresight linked with Coronavirus but because we believe markets had been showing signs of overvaluation and a backdrop of declining economic activity. Therefore, the portfolio returns of the DMS Verbatim Multi-Index funds have been somewhat better than many peers during the tough days of March.
Looking forwards, we are confident there will be many positives emerging on the other side of the pandemic. At a markets level, we are in a far stronger position in terms of liquidity, monetary policy and favourable fiscal support supplemented by committed governmental spending. Other asset classes remain less attractive with yields pegged to ultra-low or negative levels. This backdrop coupled with the potential for a speedy build-up of economic activity once the lock down is lifted should provide for a strong rebound in equity prices. We will consider opportunities as they are presented and, if necessary, will implement portfolio changes aimed at capturing a possible equity rebound. Caution and prudence remain our watch words and will drive our actions during this important time.
The value of investments and any income from them can go down as well as up and is not guaranteed. Your clients could get back less than they originally invested. Past performance is not a guide to future performance. The portfolios' investments are subject to normal fluctuations and other risks inherent when investing in securities. Verbatim Asset Management has taken due care and attention in preparing this document, which is solely for the use of professional advisers. Verbatim cannot be held responsible for any inaccuracies arising out of information detailed within and will not accept liability for any loss arising out of or in connection with its use. This article is for information only and should not be deemed as advice.