Jae Park and Michael Giles on the COVID-19 Crisis, Credit Cycle and Investing with Conviction
This time really is different
It’s been said before, but the truth is, this crisis appears to be very different than others we’ve experienced. It's not an asset bubble tied to exuberance, greed, default, fraud or mismanagement of a country, currencies or anything else in our man-made economic system. This crisis has potential for a much more severe impact because all non-essential economic activity has halted abruptly. The question is, where is the bottom? The answer depends on policy actions and how we all collectively handle this crisis.
We have entered the downturn and the credit cycle is resetting. Every day we go without a nationwide lockdown order in the US, the odds of a severe downturn rise. There's a multiplier effect on the length and severity of the downturn as the virus spreads exponentially. The start date of an effective, broad US shutdown is the critical factor.
Our Macro Strategies team has laid out the following base case. Assuming the US essentially shuts down around April 1, the US economy should recover in the third quarter. The virus would peak around April 20, with new cases slowing at that point and quarantine being lifted in early May. The US economy would trough around June 1. However, delaying lockdown by even a month would overwhelm the healthcare system, risking greater loss of life and no economic recovery until the fourth quarter or beyond.
Going into this crisis, our teams were very defensively positioned. They had ample liquid reserves on hand because we’ve been anticipating the end of the cycle and eventual downturn for quite some time. The reserves have been useful for opportunistically legging into risk positions when potential attractive valuations appear. Loomis Sayles tends to be a provider of liquidity when there’s panic selling in the markets. Our investors take positions in securities that they believe will revert to normal valuations in the long run. This is the type of environment where we rely on fundamental research to build long-term value into client portfolios.
Each of our investment strategies has clearly defined risk/return objectives and the means to seek consistent alpha over time and in every market environment. We have a wide range of products in fixed income and equity from the lowest risk to very aggressive opportunistic products and my role, which is an extension of Jae’s position as CIO, is to monitor the opportunity sets emerging during this period of volatility and make sure our teams can execute effectively.