The path for charities
As global stock markets dive in the face of the COVID-19 pandemic, charities may be wondering what they should be doing with their portfolios, if anything. No doubt, this has been a terrible economic jolt which has made many people ill with fear. Not just about their health and their financial security, but about the potential for the whole financial system to come apart at the seams.
We want to give you some tips to help you to navigate your way through these turbulent times. When prices are tumbling it’s easy to want to hit sell. But doing so may result in financial scars which you’ll wear forever. Most charities invest for the long term, so look beyond today’s short-term noise and avoid a potentially costly panic move.
Consider the long term
It may not feel like this, but financial crises are actually relatively rare events and the risk of the current market correction evolving into a crisis is thought to be low. About 150 years of history suggests crises have common precursors. They tend to be preceded by an extraordinarily rapid increase in leverage (of a speed that we have not seen over the past decade), often as a result of financial de-regulation (quite the opposite to today) and an overextension of credit to un-creditworthy borrowers as a result of imprudent lending standards, especially by weak banks with inadequate capital (again no systemic evidence of that today). So if you can, try to look past short-term turbulence to establish whether the cause of shorter-term moves has any impact on your medium and longer-term outlooks.
Dividends in the current crisis
Earnings will be under pressure throughout 2020 due to the increasingly enforced social distancing measures, the length of which is impossible to forecast, but which will impact all areas of life and work. Some areas of the market will see more significant downside to earnings, such as travel, leisure, retail, oil and mining, especially where this is coupled with high financial leverage.
Many charities rely on dividends to meet their income requirements. Ordinarily companies’ management teams would look to maintain ordinary dividends as a priority. However, we are in extraordinary times and most companies will not have contingency plans for this unanticipated and sharp reduction in economic activity. Missed sales will lead to profit shortfalls and in some cases losses. The unexpected nature of the crisis may excuse managements for cutting unaffordable dividends, especially if others are doing so. We think charities should prepare to see a significant fall in income here, although clearly this will vary according to sector exposure.
Valuations may start to look attractive
If fiscal and monetary policy does begin to arrest the tightening of financial conditions, and firms don’t start to position for a protracted crisis, at that point we believe it would be sensible to take on greater exposure to stock markets. But this is also conditional on the spread of the pandemic. If the transmission and morbidity profile worsens, and/or adequate stimulus fails to get passed, it may make sense to reduce equity exposure, depending on where valuations are at the time, because the risk of a prolonged recession would have increased.
Equity markets have a tendency to overshoot and there may be even better entry points presented tomorrow. However, we don’t have a crystal ball. We can’t know what will happen in a few days or a few months, but we are long-term investors. We asked ourselves, “would we regret missing an opportunity at these levels in two years’ time?” The answer, given the information in front of us, was yes. Unless we believe that the world will definitely enter a recession in 2020 and that 2021 will not follow a V-shape but an L (as a result of a financial crisis, perhaps), today looks a good entry point to realise long-term value.
The next few weeks will be challenging for investors, so please do get in touch if you have any questions.
Telephone: 020 7399 0128