Investing in good companies works
Much has transpired across global capital markets over the last few months. Just after the World Health Organization officially declared coronavirus (COVID-19) a pandemic, stock markets were aggressively selling off on a daily basis, oil prices were collapsing, and economic activity was grinding to a halt. The unknowns surrounding the virus and the global economy seemed innumerable at the time.
While substantial risks remain – both from a public health and economic standpoint – stock markets have rebounded significantly higher since the low point in March. Social distancing measures helped flatten the infection curves, allowing investors to begin focusing on the future amidst the backdrop of unprecedented fiscal and monetary support by central banks and governments across the world.
Never before have we experienced such a massive coordinated effort by major central banks to lower interest rates and provide nearly limitless liquidity to keep markets functioning. At the same time, governments across the globe were providing massive amounts of stimulus money to their citizens. While we applaud the efforts taken to deal with a global pandemic that took everyone by surprise, we also acknowledge the considerable risks that remain. In no particular order, the following list summarizes what concerns us most as we work our way through this unprecedented period:
– Will we get a second wave of COVID-19 infections during flu season, and how harmful will it be?
– Will a vaccine be developed and when?
– How long will it take for economic activity and employment to fully recover?
– What are the long-term implications of increased government borrowing on global economies?
As investment practitioners, we are quite accustomed to investing in a world with considerable unknowns. At the risk of sounding a bit glib, to some extent this period of time is no different than any other – there are simply new and unique things to be concerned about. Instead of focusing entirely on the risks and allowing fear of the unknown drive our decision making, it’s important to keep an eye toward the long term and remind ourselves that we will get through these uncertainties. Economies and corporations will once again flourish. Moreover, during any period of time, whether we are in the midst of a pandemic, or enjoying economic prosperity, quality long-term investments can be found.
From a stock market perspective, we continue to see good value amongst many dividend-paying companies in particular. Income-producing stocks have largely been ignored by market participants over the past few years in favor of growth stocks – primarily in the technology industry. While we own many of these growth tech stocks in client portfolios where appropriate for our client’s goals, we will continue to make long-term investment decisions based on company fundamentals, focusing on revenue and earnings growth, balance sheet strength, and ultimately valuation. To the extent fixed income securities (bonds) are appropriate, we are intentionally favoring shorter-term bonds with good credit quality. Interest rates remain historically low, diminishing future returns for bond investors – particularly those who own longer duration bonds.
Considering the risks we highlighted above, as well as the improving economic landscape, and thanks in large part to the coordinated action of governments and central banks, we remain cautiously optimistic as we head toward the latter half of 2020.
Ian N. Breusch is the chief investment officer for The Sanibel Captiva Trust Company.