Time for a Long-Term Perspective

Time for a Long-Term Perspective

With markets experiencing their worst falls since the global financial crisis, we believe focusing on long-term themes is more important than ever for investors.


Here we outline a pragmatic view of the current situation and how our investment philosophy enables a balanced and opportunistic response to market conditions.

 

Historic Market Context

The ‘black swan’ event of the coronavirus is bringing high risk of downside to the economic momentum globally, and therefore to corporate earnings in the short term. The magnitude of the downside risk is difficult to quantify at this stage, being dependent on how long and how severely the virus crisis is going to impact economic activity.

As a result of this fear and increased uncertainty, equity markets have significantly repriced globally from historically high valuations. However, it is worth considering this event in an historic context against other prominent market falls and the overall upward trajectory of share prices in the last thirty years.

 

Source: FactSet, S&P 500. As at March 2020. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

Immediate Economic Outlook

The impact of the virus is undoubtedly globally significant in the short term, constituting both a supply and demand shock at the same time.

Beyond China’s growth figures, which will be particularly badly hit, supply chains and global GDP will also be severely impacted, with Europe likely to suffer more than the US. At the market level, investors could remain in fear mode for a while.

However, this downward pressure in economic momentum is likely to trigger sizeable and potentially globally synchronized policy responses in the next 6-9 months to ensure the world doesn’t dip into a recession.

Central banks are on stand-by to act in an even more accommodative manner (and have in some instances already started to act), should economic activity suffer too much from the pandemic fear. We are also likely to see sizeable fiscal policy responses across key economies. Both of these could trigger a positive market response.

Market Reaction

Markets are likely to remain in fear mode for several weeks. We predict 2020 will continue to be volatile given both the short-term headwinds to growth and earnings, and the likely supportive monetary and fiscal measures we might see.

There will therefore certainly be plenty for the short-term pessimists to focus on. Depending on risk appetite, the market may or may not be willing to look through the sizeable earnings downgrade risk and profit warnings coming up in Q1 and potentially Q2, possibly leading to the need to reduce 2020 estimates. In the coming months, it will be a period of hoping for economic activity to recover in the second half of the year.

We believe markets will bottom once evidence of policy response comes through, once pandemic threat eases (contagion risk plateauing, hopes of a vaccine fast-tracked to availability) and/or the short-term negative impact on economic and corporate activity is accounted for.

Conclusion

Short-term investors will focus on the earnings downgrades to come at quarterly results, but for long-term investors, we see this period as an opportunity to buy selected stocks at more favourable entry points than previously.

A clear focus on quality businesses with strong balance sheets, pricing power, high returns and sustainable business models helps withstand short-term downward pressure, while accessing the economic benefits of longer-term growth themes.

We have identified three megatrends which we believe are going to be driving market dynamics across a range of industries, long after the current share price slump has passed: Demographic Change; the Future of Technology; and Resource Scarcity.

These are mega-trends that will remain relevant on a multidecade perspective and we will therefore look to use this valuable time to seek out companies that are long-term beneficiaries of these themes at attractive valuations.


Definitions:

The Asian financial crisis was a period of financial crisis that gripped much of East Asia beginning in July 1997 and raised fears of a worldwide economic meltdown due to financial contagion.

The black swan theory or theory of black swan events is a metaphor that describes an event that comes as a surprise, has a major effect, and is often inappropriately rationalized after the fact with the benefit of hindsight

A central bank is a national bank that provides financial and banking services for its country's government and commercial banking system, as well as implementing the government's monetary policy and issuing currency.

The Global Financial Crisis (GFC), also known as the financial crisis of 2007–08, the global financial crisis and the 2008 financial crisis, was a severe worldwide economic crisis considered by many economists to have been the most serious financial crisis since the Great Depression of the 1930s, to which it is often compared.

FactSet Research Systems provides computer-based financial data and analysis for financial professionals, including investment managers, hedge funds, and investment bankers.

Gross Domestic Product (“GDP”) is an economic statistic which measures the market value of all final goods and services produced within a country in a given period of time.

A pandemic is the worldwide spread of a new disease.

The S&P 500 Index is an unmanaged index of 500 stocks that is generally representative of the performance of larger companies in the U.S.

“Taper tantrum” refers to the financial markets’ reactions, in May-August 2013, to the announcement by the Federal Reserve that it was planning to decrease, or “taper” its $70 bn per month bond buying program.

The tech bubble (also known as the dot-com bubble and the Internet bubble) was a stock market bubble caused by excessive speculation in Internet-related companies in the late 1990s.

Trade wars refers to the China–United States trade war, which began in 2018, which is an ongoing economic conflict between the world's two largest national economies, China and the United States.

Top

Important Information

 

All investments involve risk, including possible loss of principal.

The value of investments and the income from them can go down as well as up and investors may not get back the amounts originally invested, and can be affected by changes in interest rates, in exchange rates, general market conditions, political, social and economic developments and other variable factors. Investment involves risks including but not limited to, possible delays in payments and loss of income or capital. Neither Legg Mason nor any of its affiliates guarantees any rate of return or the return of capital invested. 

Equity securities are subject to price fluctuation and possible loss of principal. Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls.

International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.

Commodities and currencies contain heightened risk that include market, political, regulatory, and natural conditions and may not be suitable for all investors.

Past performance is no guarantee of future results.  Please note that an investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.

The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, guarantee of future results, recommendations or advice.  Statements made in this material are not intended as buy or sell recommendations of any securities. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed. Information and opinions expressed by either Legg Mason or its affiliates are current as at the date indicated, are subject to change without notice, and do not take into account the particular investment objectives, financial situation or needs of individual investors.

The information in this material is confidential and proprietary and may not be used other than by the intended user. Neither Legg Mason or its affiliates or any of their officer or employee of Legg Mason accepts any liability whatsoever for any loss arising from any use of this material or its contents. This material may not be reproduced, distributed or published without prior written permission from Legg Mason. Distribution of this material may be restricted in certain jurisdictions. Any persons coming into possession of this material should seek advice for details of, and observe such restrictions (if any).

This material may have been prepared by an advisor or entity affiliated with an entity mentioned below through common control and ownership by Legg Mason, Inc.  Unless otherwise noted the “$” (dollar sign) represents U.S. Dollars.

This material is approved for distribution in those countries and to those recipients listed below. Note: this material may not be available in all regions listed.

All investors and eligible counterparties in Europe, the UK, Switzerland:

In Europe (excluding UK and Switzerland), this financial promotion is issued by Legg Mason Investments (Ireland) Limited, registered office 6th Floor, Building Three, Number One Ballsbridge, 126 Pembroke Road, Ballsbridge, Dublin 4, D04 EP27. Registered in Ireland, Company No. 271887. Authorised and regulated by the Central Bank of Ireland.

All Qualified Investors in Switzerland:
In Switzerland, this financial promotion is issued by Legg Mason Investments (Switzerland) GmbH. Investors in Switzerland: The representative in Switzerland is FIRST INDEPENDENT FUND SERVICES LTD., Klausstrasse 33, 8008 Zurich, Switzerland and the paying agent in Switzerland is NPB Neue Privat Bank AG, Limmatquai 1, 8024 Zurich, Switzerland. Copies of the Articles of Association, the Prospectus, the Key Investor Information documents and the annual and semi-annual reports of the Company may be obtained free of charge from the representative in Switzerland.

All investors in the UK:
In the UK this financial promotion is issued by Legg Mason Investments (Europe) Limited, registered office 201 Bishopsgate, London EC2M 3AB. Registered in England and Wales, Company No. 1732037. Authorized and regulated by the Financial Conduct Authority. Client Services +44 (0)207 070 7444

All Investors in Hong Kong and Singapore:

This material is provided by Legg Mason Asset Management Hong Kong Limited in Hong Kong and Legg Mason Asset Management Singapore Pte. Limited (Registration Number (UEN): 200007942R) in Singapore.

This material has not been reviewed by any regulatory authority in Hong Kong or Singapore.

All Investors in the People's Republic of China ("PRC"):

This material is provided by Legg Mason Asset Management Hong Kong Limited to intended recipients in the PRC.  The content of this document is only for Press or the PRC investors investing in the QDII Product offered by PRC's commercial bank in accordance with the regulation of China Banking Regulatory Commission.  Investors should read the offering document prior to any subscription.  Please seek advice from PRC's commercial banks and/or other professional advisors, if necessary. Please note that Legg Mason and its affiliates are the Managers of the offshore funds invested by QDII Products only.  Legg Mason and its affiliates are not authorized by any regulatory authority to conduct business or investment activities in China.

This material has not been reviewed by any regulatory authority in the PRC.

Distributors and existing investors in Korea and Distributors in Taiwan:

This material is provided by Legg Mason Asset Management Hong Kong Limited to eligible recipients in Korea and by Legg Mason Investments (Taiwan) Limited (Registration Number: (109) Jin Guan Tou Gu Xin Zi Di 016; Address: Suite E, 55F, Taipei 101 Tower, 7, Xin Yi Road, Section 5, Taipei 110, Taiwan, R.O.C.; Tel: (886) 2-8722 1666) in Taiwan. Legg Mason Investments (Taiwan) Limited operates and manages its business independently.

This material has not been reviewed by any regulatory authority in Korea or Taiwan.

All Investors in the Americas:

This material is provided by Legg Mason Investor Services LLC, a U.S. registered Broker-Dealer, which includes Legg Mason Americas International. Legg Mason Investor Services, LLC, Member FINRA/SIPC.

All Investors in Australia and New Zealand:

This document is issued by Legg Mason Asset Management Australia Limited (ABN 76 004 835 839, AFSL 204827).  The information in this document is of a general nature only and is not intended to be, and is not, a complete or definitive statement of matters described in it. It has not been prepared to take into account the investment objectives, financial objectives or particular needs of any particular person.

Forecasts are inherently limited and should not be relied upon as indicators of actual or future performance.

The aforementioned Legg Mason entities are wholly owned subsidiaries of Franklin Resources, Inc.

Forecasts are inherently limited and should not be relied upon as indicators of actual or future performance.