As I am writing this, the world looks to have suddenly sunken into uncertainty as deep as was experienced in the financial crisis. In Italy, the market declined over 11% in a day, in Australia over 7%, in Japan over 5%, in France over 8%, and Europe’s Euro STOXX 50 declined by 8.45%. In the United States, the S&P 500 index dropped 7.60%. Quite some declines!
At the time of the previous investor letter, the coronavirus worries primarily concerned Asia. Now the problems have spread to other continents as well. The highly priced US S&P 500 Total Return index lost 7.54% in euros in February. From these valuation levels, there is still a long way down. The S&P Europe 350 Total Return index fell by 8.57% over the month. HCP Quant’s benchmark index MSCI ACWI SMID Value Total Return lost a total of 9.39%. HCP Quant declined by “only” 7.39%, which is hardly comforting, even though it is clearly less than the benchmark index. That’s how rough February was, and March does not look any easier.
As I see it, the coronavirus has the potential to push the world economy into a new recession, even a depression. Actually at least a short-term recession looks at this moment almost inevitable. In the modern world, supply chains are noticeably longer and more complicated than even a decade ago. Sturdy measures against the coronavirus disrupt these supply chains. Even though companies’ order books look full, the situation can be such that ordered products could not be produced or delivered. The most immediate effects have been seen in industries with direct connections to people’s mobility, such as airlines and tourism in its various forms.
The longer the situation lasts, the more difficult it is in an economic sense to clear the crisis. The virus quite justifiably scares people. With the uncertainty being high, people delay large purchases, such as buying cars or apartments. When consumers’ trust decreases, the economic machine slows down as well.
Part of companies have enough inventory, on the basis of which to keep production up, but with the situation going on problems will spread to these companies as well. Before long, problems will rise in the real world as well. A café owner in Milan can hardly keep the café running for months without customers or a technology company produce smartphones, if it does not get all the necessary components. Central banks’ tools will not make the coronavirus go away, which makes the situation troublesome for the real economy. According to the EU Chamber of Commerce’s report over 90% of European companies operating in China have announced that their business will suffer already significantly.
Despite worrying news, an investor should not despair. One should remember that where there are trouble, there are opportunities. A software company telecommuting solutions probably makes good profits, hand-disinfictentant manufacturers are working long, and facial masks are bought up regardless of price.
What about Quant? Because HCP Quant is invested in stocks, it will go down with the rest of the market. The companies in the portfolio are now clearly more cheaply priced than on average, so it is well possible, that the fund weathers the storm with slightly smaller damages. One could assume that a cheaply priced company has less downside than a highly priced “future promise.” Now the turbulence at hand can be a market-changing force, which would make value investing work again. But before that one needs to have the patience to ride the elevator all the way to the ground floor. This luckily happens much faster than climbing the market stairs up.
The HCP Quant fund has on Friday sold off, as mentioned in the previous investor letter, its investment in Premier Oil. Russia on Friday decided to break with OPEC, and that decision was followed by Saudi Arabia’s decision to cut the price of crude oil. The price cut is the biggest in 20 years. As a consequence of this, the price of crude oil fell about 30%. Premier Oil fell on Monday by over 57%. Friday’s sale was based on the stop-loss and one could say, that this time the sale was timed successfully before a historically large drop in the price of oil.
Finally a reminder of the approaching subscription day. We are open to new investment all of March. In the currently unstable situation I would like to encourage you to familiarize yourself with the HCP Black fund. If you feel that stocks are too risky right now, and fixed-income has no returns to expect, then perhaps an investment strategy like that of HCP Black could offer some safety. The fund is invested very defensively. A subscription can be done the familiar way by clicking the button below. Please remember that the subscription sum must be seen in the bank account on Tuesday March 31st by 4 p.m. at the latest.Book a virtual meeting Make a subscription
HCP Quant portfolio manager
“This too shall pass.”
– Persian saying
(This is a translation of the Finnish-language HCP Quant investor letter.)