There has been much debate as to whether the market has reached its bottom. Trying to pick market inflection points be it the top or bottom range of the market can be difficult in the best of times. The last two months have felt like an eternity not only in terms of markets but from a life in general perspective. Many of us are working from home, homeschooling our children, we are rolling back the years with petrol prices and many people close to us have seen their businesses and job security plunge into uncertainty.
We’ve seen markets fall faster than during the financial crisis over a decade ago and at the same time we’ve seen central banks and governments respond quickly and in an unprecedented fashion in terms of scale. On average, governments have committed approximately 10% to 15% of their annual GDP to implement backstop measures to prevent their economies plunging into a deep recession or a depression. The US Federal Reserve has injected markets with a massive liquidity boost not only buying US treasuries but buying investment grade credit and high yield bonds.
So, have we seen the bottom or is there more downside to come? The fundamental question is how much of any future bad news has the market already priced in. This is one of the key things we asked ourselves in our most recent investment committee meeting. If we break down the key factors of our dynamic asset allocation process, we believe that over the long-term valuation is a key indicator of future returns, but that over the medium term where we are in the cycle, liquidity and policy have an important influence on markets.
Based on these factors our view is that risk assets are more attractively priced than they were prior COVID-19. Policy and liquidity is accommodative to risk assets, economic data is negative and shorter-term sentiment indicators remain negative albeit risk gauges such as the VIX index moving down from their highs.
In a nutshell, we believe that market volatility will persist, there will be further bad news to come, but if we look ahead three years, we believe asset prices are likely to be higher than they are today. Based on this view we have neutralised our slightly underweight exposure to risk assets and reduced our exposure to alternative assets and cash.
So, don’t try to pick bottoms. We know that it doesn’t end well. In such environments where news is changing on a daily basis it is important to focus on your investment philosophy, process and investment time horizon.
Stay safe and healthy.