19 March 2020
As the number of reported COVID-19 cases continues to increase, our primary concerns are the well-being of our clients, employees, and business partners and the effective stewardship of our clients’ capital. In the face of turbulent markets, portfolio managers and research analysts across GMO are leveraging our diverse expertise to continually discuss our views of events and the potential impacts of COVID-19. Below are some of our most recent views.
Read the full letter to Asset Allocation investors here.
The COVID-19 coronavirus pandemic has moved from being a China-specific concern to becoming a global threat to health and economic growth. GMO’s Focused Equity team considers a global recession highly likely (and we have now been joined by the consensus). We have been active in the market, buying more defensive names in the early days of the coronavirus period when we thought the risks were underappreciated, while in recent days adding to some underperforming holdings and new positions where we feel the market has gone too far. Outside of the most obviously affected sectors, market selling has been somewhat indiscriminate, which means there is an opportunity to add to the best companies at attractive prices. We are excited about the long-term outlook and will not try to time the short-term bottom of the market.
We have taken advantage of the recent volatility and repositioned the Climate Change Strategy a few times since the beginning of this bear market, mainly rotating into names that have become more attractive and deploying some cash. Some names have held up relatively well, such as electric utilities and lithium producers, while others have seen inordinately large declines in their share prices, such as agriculture and copper companies. Nothing about the COVID-19 pandemic itself affects the long-term secular trend toward investment consistent with adapting to and mitigating climate change.
We have analyzed various scenarios related to the impact of COVID-19 across both our Quantitative and Fundamental research teams within GMO’s Emerging Markets Equity team. At this point, the big three EM countries (China, Taiwan, and Korea – accounting for about 64% of EM) are ahead of the curve relative to most developed markets. We believe that any analysis of COVID-19 impacts on countries should consider not just the supply chain aspects but also the willingness and ability of governments to engage in significant fiscal and monetary measures. We expect companies generally to take a hit to near-term earnings and stage a recovery later. We also see COVID-19 as providing added impetus to companies globally to broaden their supply chains beyond China. We believe that this crisis presents an opportunity to those who are willing to overlook short- to medium-term noise to buy into an attractive asset class at an even larger discount.
COVID-19 appears to be a somewhat differentiated shock among the kinds of shocks that ultimately have had only temporary effects on global growth and globalization in general (e.g., 9/11, Fukushima, SARS/MERS, and others). So far, we think we know that spread via asymptomatic patients, lengthy incubation periods, and an increasing likelihood of prolonged, imposed quarantine or self-quarantine measures will dent global growth. Key for risky assets like emerging debt is:
1. will such a dent be temporary, like the other episodes above, or
2. will trend global growth suffer permanently if de-globalization is accelerated?
In very select cases of emerging countries without likely access to international support, we’re monitoring whether any temporary shock turns any liquidity/rollover needs into a restructuring scenario. We also are considering carefully the impact on the U.S. election, with feedback loops/substitution effects via equity markets onto other risk assets like emerging debt.