Seeking Income in an uncertain market environment
September 9, 2020
It makes a big difference whether you think that this is a spread of an important disease that is causing a lot of angst, but temporarily -- to be defined, what temporary means, six months, 12 months -- or whether it's structural. I strongly believe that it is temporary in nature. This is not structural, and therefore we're probably getting to a point where markets have been overreacting to their extrapolation of a temporary phenomenon into a permanent one.
Having said that, there are a number of real short-term risks and particularly around the liquidity of individuals and the liquidity of some corporations. Because when activity stops, when you can't go to work, when you're not selling any goods and services, your cashflow dries up, yet a lot of your expenses do not.
The situation is quite serious and we should not, of course, forget the considerable human cost. Not just those affected by the virus itself or their families, but the angst that has been shown by the broader population. And that's where it begins to affect markets, because that affects economics.
The market goes through these phases of denial, acceptance and then exaggeration. And it seems to me that we're beginning to get to that point. You see significantly more volumes. In which case that tends to mean that certain securities are getting underpriced at the moment. The selling is there. And also investors who don't have sufficient liquidity themselves tend to sell what they can sell, not what they should sell, in which case, again, you get this mispricing of risk and opportunity in the marketplace.
That final level of panic is what creates the opportunity because share prices, bond prices, move in quite extraordinary ways. There's an opportunity for us, if we're thinking long-term, to take advantage of that.
People mix up that volatility, that movement up and down around the path with a change in direction. What investors really need to worry about when they're making a long-term plan, or if a pension fund is looking to fund its long-term liabilities is: is there a change in the direction of returns over time? It's really nothing to do with the short term volatility.What I wouldn't recommend is for people to go to cash. Rates are very low and if there is going to be a monetary response to this situation, rates are going to go even lower. Unfortunately you just have to sort of live through the current volatility. But I believe it will pass and it usually does when you get to these heightened levels.
The winners and losers, they'll will be determined by the amount of deep proprietary research that you're carrying out. I really think that this is absolutely the time to think about exposure to a strategy that is actively managed with thorough proprietary research.
What we'll be looking for is a lot of intensive research by ourselves on the liquidity position of the companies we invest in, in behalf of our clients, the policy response of governments and central banks to this liquidity
issue, and then whether we can see a peak in the spread of the number of infections. If you get the right answers to those, I think you'll see a fairly quick correction in both economic activity and then markets.
The views expressed are as of March 2020, may change as market or other conditions change and may differ from views expressed by other Columbia Management Investment Advisers, LLC (CMIA) associates or affiliates. Actual investments or investment decisions made by CMIA and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Since economic and market conditions change frequently, there can be no assurance that the trends described here will continue or that any forecasts are accurate.
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