Active managers tend to love a good crisis. That’s when they can make some extra money for investors and push themselves up the performance charts. With the current crisis – a health pandemic, oil-price shock and political dramas – they may even be rubbing their hands with glee. There’s a little self-interest there, too.
Martin Currie, an Edinburgh-headquartered active global equity specialist manager dating back to 1881, which has a leading involvement in emerging markets, as well as Australian equities, believes it is particularly well positioned relative to other managers in the current environment. There will be winners and losers in all of this. The trick will be to tell which will be which.
Alastair Reynolds, emerging markets (EM) portfolio manager, who, with Andrew Mathewson, fellow EM portfolio manager, visited Australia from Edinburgh earlier this month, admits that the COVID-19 will impact both the emerging and developed markets in the short term. The virus has already been identified in more than 100 countries and everyone knows its origin was China, the world’s largest emerging market. But it is not as simple as identifying emerging markets as the losers from the COVID-19 economic fallout. Italy, for instance, has almost completely shut down.
“The Chinese have managed to rally around business,” Reynolds says. “It doesn’t inevitably mean a global recession,” he said prior to the US and global correction of about 8 per cent across markets last week. “We are seeing each government come out with policies to try to minimise financial stress… But it certainly looks like a precursor to a slowdown, in the least.”
Mathewson says that, to the extent that markets drive economies, the market falls, when coupled with the oil price collapse last week, will have a big economic impact. “Habits become lasting,” he says. “But this doesn’t, to us, seem like a lasting problem.”
The Chinese are very good at reacting quickly to a crisis. Not only did they build a 1,000-bed hospital for quarantined victims within 10 days, they also quickly converted some state-owned car factories into the producer of protective garments and other related products. You have to love central planning in times like this.
Reynolds says that, however long the crisis lasts, the market will view it as non-recurring. “It’s not a reason to sell,” he says. “It’s not important to long-term forecasts… We’ve verified it within our portfolio and, while perhaps some businesses will suffer badly, there will be others that do better.”
We saw this in the UK where Fly BE, for instance, a no-frills airline has collapsed already and national airlines are suffering badly. In Australia, Qantas last week cancelled about 25 per cent of its international flights for over the next two months. Others, such as Singapore Airlines and Air New Zealand, are expected to follow suit to some extent.
Reynolds said that not all businesses will lose out in the COVID-19 outbreak. “The crisis will actually boost certain trends and accelerate structural changes which are already underway,” he said.
One of the implications of the spread of the virus was that supply chains for businesses might present problems. It might advantage businesses which are closer to their end customer. “Other industries, such as online education, will get a boost,” Reynolds said.
From a relative perspective, our preferences are not so different to before the virus appeared, he says. “The fastest runner will always be the fastest runner.”
Kimon Kouryialas, Martin Currie’s co-head of global distribution, based in Melbourne, said that the firm’s emerging markets strategy often performed well in times of market volatility. “We do better than our peers when markets are jittery and when they are heading south,” he said. “I just hope they don’t go far south for too long.” He added that investors should get ready for an entry, or re-entry, point if market prices fall any further. “This is a classic case of a buying opportunity in the making,” he said.
– G.B.
Note: Martin Currie is a sponsor of Investor Strategy News. Any opinions expressed, though, may be those of the author, not necessarily those of Martin Currie.
