Ron Sanchez Audio Segment: Taking Stock of the Coronavirus Effect On Markets


Transcript of the Recording:

Hello everyone. This is Ron Sanchez, the chief investment officer of Fiduciary Trust and I wanted to reach out to you to share some of our perspectives during this period of market turmoil. As we all know, the root cause of the market volatility and the market sell off that we've been enduring for the last several weeks is the breakout of the coronavirus. Simply put, this is a shock to markets on two fronts. First, it's a supply shock. Initially, the concern centered around China where the breakout originated and the shutdown of production facilities, which would inevitably result in supply chain disruptions. But as the virus spread globally, it's also spread to the demand side. And as we've seen over the last week or two, the response by both the public and private sectors have enacted a number of risk mitigation policies, or steps, to stem the tide of the virus. And they've included canceling events, travel bans, telecommuting and yesterday's unprecedented move by the Italian government to lock down the entire country and attempt to stem the tide. And obviously that will have a material impact on current economic activity.

With that as a backdrop, I'd like to cover a number of areas, four to be precise: one, what we don't know; two, what we do know; three, what we expect; and, four, what we need to focus on or remind ourselves during periods like this.

Starting with the most obvious that's had the most impact on markets is what we don't know. And so, although it could be a long litany here, suffice to say, the magnitude and duration. In the absence of this information, it's really difficult to make an assessment of the ultimate impact both on the economy as well as markets. And so that's one.

Two, what we do know. Markets are rerating to reflect this growing risk and extreme uncertainty. Rerating has occurred at lightning pace. This is the quickest 10% correction in history and after significant drop in markets, we’re now down 18% since the February 19th high, so a stunning price action. Third, this is a classic flight to quality and the definition of that is simply indiscriminate selling of risk assets, in this case, global equity, and the buying of safe-haven assets in bulk. Also, I'd like to point out on what we know is that markets are trading on extreme uncertainty, emotion and panic. If I look at it, the last a week or so, it's close to untradeable. We've now experienced moves almost becoming a daily occurrence of 4%. I mean, it's just unprecedented. It's also just not the price. I think it's important to realize that investor positioning, meaning the decline in stock allocations is the largest since 2008 and maybe just as important, we also know that the economic environment, pre-corona was on solid territory and, although it's hard to assess where we are today, I think it's somewhat reassuring knowing that we entered this period of market stress from a position of strength.

And so maybe I'll move on to the third—what we expect. So a couple of points here. One, we anticipate the spread will continue over the next several weeks and so that should contribute to elevated market volatility and we, again, expect that to persist for several weeks and, thus, too early to make a call on market bottom. With respect to the government response. I think there's some important dynamics here that will unfold over the days and weeks. We do anticipate that on both fronts, both monetary policy and fiscal.

On the monetary side, we anticipate further action to support, economies globally. To date, we've seen a number of central banks take monetary policy action including the US last week as well as Canada. But we also expect more central banks to take decisive action. And so the ECB, the European Central Bank, this week, the Fed, could simply move this week, but has a meeting scheduled next week. And not only do we expect them to cut rates, but we expect them to expand liquidity as well to the banking system and not just monetary policy but combined with fiscal policy. To date, I think there has been around $54 billion in appropriated funds to fight the coronavirus, but we expect there to be additional measures to be taken and more targeted. So for instance, there's some bantering around about various cuts to taxes, but I think a temporary expansion of the paid sick leave, tax rebates, policies that are aimed at ensuring credit availability to small businesses that really are feeling the full brunt of the event. We also, I think what we expect, is that there is the likelihood that the negative shock that we're currently experiencing proves to be largely temporary in nature. And so sometimes during the second half of the year, we expect a resumption of growth and consumption. We also believe that the long-term impact on trend growth rate may be modest. And with the potential for fiscal monetary policy that I just spoke of along with low rates, low energy costs, this could be quite supportive for a resumption of growth. And I think we've seen a little bit of the early signs of this dynamic unfolding in China.

And so that brings me to my last topic—what we need to focus on. And the three points I'd like to mention here, one, the long-term perspective, two, patience and stay the course and three, portfolio positioning.

On the first one, long-term position perspective, always hard to do in periods of time like this, but we need to recognize the situation is fluid. It is headline driven and we need to recognize that this is a moment in time and refrain from emotional and price-driven investment decisions, Two, patience and stay the course. At this point, I think we need to let developments play out, in order to assess the both the immediate and long-term impact on economic and corporate fundamentals. And three, we're able to take this position based on our portfolio positioning.

We are comfortable with our positioning on a number of fronts. I'd like to highlight them. One, our outlook and positioning and portfolios was reasonably cautious and defensive, pre-coronavirus. Two, we have elevated cash levels and accounts. This is not only important from buffering the downside, but also to provide portfolio flexibility and quiet liquidity if need be. And, three, our overemphasis on both quality and diversification. We know what we own. These are best- in-class companies that possess dominant market positions, strong cashflow and balance sheet strength that we believe will prevail during periods of market stress that we're currently experiencing. So in summary, we have the conviction and confidence to weather the storm and quite frankly, the ability to capitalize on opportunities that will inevitably present themselves over the period ahead. I want to thank everyone for taking the time and encourage clients to speak to their portfolio management teams here at Fiduciary Trust regarding any questions you may have. Again, thank you.

The information provided is intended solely to provide general information. The information and opinions stated may change without notice. The information and opinions do not represent a complete analysis of every material fact regarding any market, industry, sector or security. Statements of fact have been obtained from sources deemed reliable, but no representation is made as to their completeness or accuracy. The opinions expressed are not intended as individual investment, tax or estate planning advice or as a recommendation of any particular security, strategy, or investment product. Please consult your personal advisor to determine whether this information may be appropriate for you. This information is provided solely for insight into our general management philosophy and process. Historical performance does not guarantee future results and results may differ over future time periods.


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