Comment on Q1 2020: Global health crisis becoming an economic crisis

2020 had started on a good note for our strategies, and for emerging and frontier markets in general, on the back of the Sino-US trade deal signed in January, and because of a prevailing risk-on mode. But as the spread of the coronavirus became global and seemingly unstoppable, the global health crisis completely took over the agenda for investors, governments and societies at large. 

The introduction of confinement and travel restriction measures around the globe has put a halt to trade, to investment, to business and even to the usual way of life for billions of people.

In addition to the general covid-19 related sell-off, the oil price clearly had a major impact on some markets. Brent crude corrected by 66%, from USD 66/bbl to 23/bbl during the quarter. This was driven by the unprecedented demand collapse due to covid-19-related lockdowns (currently affecting almost half of the world’s population), and the supply side shock of OPEC+ falling apart in early March. The latter was exacerbated by the subsequent decision by Saudi Arabia to slash their selling prices and ramp up production.  

Emerging markets experienced their second-largest ever quarterly correction and a significant rise of volatility across all asset classes, to levels not experienced since 2008. Within emerging markets, the sell-off was indiscriminate; fundamentally sound companies and relatively stronger economies were not spared.

For us, running strategies exposed to risky assets andfocusing on long-term capital growth, there was just nowhere to hide, and all our funds ended the quarter in the red. Relative performance was also negative, which is something we are disappointed in. This can however be explained by the nature of the stocks’ sell-off, i.e. disregarding the fundamental qualities of companies.

This is not the first crisis we have seen during our more than 20 years of investing in emerging markets. It could be said that compared to previous crises, both our portfolio companies and some countries, such as Russia and China, are considerably better prepared. Also, as our advisor Anders Borg recently explained during a webinar (link), the responses of governments and central banks have been much faster and forceful than during the global financial crisis of 2008-2009. This crisis is however particularly challenging, as it is global and multi-dimensional. Besides the human toll already recorded and increasing, the crisis exacerbates inequalities within societies and between countries. Many – if not all - emerging and frontier market economies will struggle.

What we have learned from previous crises is that there is always an inherent limited visibility as to the way ahead, and it is therefore of paramount importance to be very careful and not to make snap decisions. Another lesson we learned early on is the value of teamwork and the need to collect relevant information to assess the robustness of our portfolios and make informed decisions. This means that the amount of work goes up significantly during these periods.

In positive terms, this involves us actively seeking to add to our exposure to selected high-quality names that are able to strengthen their market position and emerge as winners in the aftermath of the crisis. Accordingly, this meant that we made more portfolio changes than usual in March, both in the number and size of our holdings, in order to better reflect our changing views on certain markets, sectors and stocks.

We also maintain a transparency with our clients and stakeholders by sharing our views on how we see the situation and updates on how we are reacting. We are now releasing weekly market comments here on our website, where you also will find the latest articles and webinars with market insights, evaluations and forecasts by our investment team. These are also shared on our Linkedin and Twitter accounts.

Have a look at our latest webinar with Emre Akcakmak, Portfolio Advisor and responsible for our frontier market investments, discussing the current situation and outlook.

Due to travel restrictions, we no longer travel and meet with companies in person, but do keep close contact via conference calls. This actually saves some time and also gives us more opportunities to assess specific ESG issues that have emerged as key topics, such as capital allocation, accounting, disclosure, health & safety, and product and service accessibility. Resilience in terms of balance sheet structure, management team quality, and sustainability of business strategies is key when it comes to characterising the potential for companies to navigate the current volatility.

As we have to brace for recession times, these key areas will matter both in terms of navigating the difficult times ahead, and for many, in order to emerge as relative winners.