The record books have been rewritten this quarter as countries around the world navigated the healthcare challenges and economic impacts of the COVID 19 crisis. The global economy moved towards a standstill as the virus spread across one region at a time. The added pressure of an oil market price war between Russia and Saudi Arabia contributed to the fastest bear market for global stocks in history. While the performance and speed of decline was shocking, there are reasons to be optimistic. Bond markets are starting to behave more normally, volatility is slowly declining, and the slow process to bring economies back online in Asia is now taking place.

Investment Strategy

Your portfolio held up much better relative to both the global and US Stock markets. The losses were still more significant than we like to see, but our holdings performed well during this crisis. There are several reasons why this happened. We have focused on owing great businesses with strong balance sheets and stocks that have less volatility than the market. These portfolio characteristics helped your portfolio outperformance. What we did not own was also extremely helpful. Not having any exposure to energy, airlines, or hospitality companies and an underweight holding in financial services companies contributed to your performance. Avoiding these sectors that significantly underperformed was helpful in the quarter.

This quarter there were two moves in your portfolio. We increased your position of Smith and Nephew in early February before the COVID 19 crisis took hold. The company is a leader in the orthopedic device market and this continues to be a stock that we like in the long term. In the short-term, elective procedures globally are going to be put on hold a few months, which will temporarily depress earnings. Digital Realty Trust acquired Interxion in March. We now own Digital Realty Trust shares, which is a data center real estate investment trust. The stock has performed well since the deal closed and we’ll plan on holding it in the near term.

There was one stock that managed to post a positive gain this quarter and that was Shopify from Canada. It squeezed out a 3.2% return this quarter. This company is viewed as the anti-Amazon because they focus on building eCommerce platforms for smaller businesses. The other “best” performers this quarter were Loblaw(-2.4%), a Canadian grocery store, and Nintendo (-3.2%), a Japanese video game company.

Outlook

We are going to break from our usual format and discuss our outlook for global markets as a whole and not by region. The duration of the COVID 19 crisis is the crucial question most investors are trying to predict. The more prolonged economic activity is suppressed, the more structural economic damage will be done. The range of outcomes is extraordinarily wide and there are no precedents to draw from for the current environment. The ultimate all clear won’t occur until a vaccine is established but the markets will start to rally before COVID cases peak and economic data bottoms.

Outside the US, economies will have different paths on their road to recovery. Consumer spending represents a much smaller component of non-US economies. Consumer confidence returning is essential but an industrial recovery will carry more weight. We expect to see Asia rebound the fastest because they were the first to see the virus outbreak. Europe’s recovery will look different on a country by country basis. Northern Europe is not seeing the same level of COVID 19 cases at this time as Spain and Italy. Both of these countries have been devasted by COVID 19. The financial situations for both Spain and Italy were weak heading into this year and the recent tragedies will only cause these issues to swell.

The question we are asking ourselves is, how will businesses, individuals, and governments change because of this pandemic? Will we see significant shifts in how companies are run and changes in daily life for people? The unknowns are still too great, but we are looking at each of the companies we own and evaluating how they will change and what are challenges they are likely to face. Our next investment move will likely not be because we want to own more exposure in Japan, the UK, or France but instead look at the companies we think will be best positioned in a post-pandemic world.

There are reasons to be optimistic. The trends in data from Europe are improving with new cases of COVID 19. This remains a fluid situation but is a positive sign. China and other Asian economies are slowly coming back online. In the financial markets, the environment has improved significantly since mid-March. There was panic in the stock and bond markets as investors rushed to cash. This as subsided as central banks stepped in to support bond markets. The bond markets are acting more orderly which should allow stocks to be less volatile. Shares have seen their volatility drop from the peak reached earlier this month. It is still above average, but the trend is improving. Time will tell if the March 23rd lows were the bottom of this bear market. We are more positive today than we were two weeks ago, but are still cautious.

Disclaimer: The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.

Global Market Viewpoints: March 31, 2020