Stock markets have been reeling under macroeconomic pressures throughout the course of April. Spiking COVID-19 cases in China resulted in the prolonged lockdown of Shanghai and caused further disruption to global supply chains that have already been impacted by geopolitical tensions.
In this latest update, Senior Portfolio Manager, Jeremy Richardson, reflects on the month’s volatility, but also the underappreciated alpha opportunities still latent in businesses.
Watch time: 4 minutes 12 seconds
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Hello this is Jeremy Richardson from the RBC Global Equity Team here with another update.
I used to work with a colleague who always used to say that bad news came in threes. Usually, he was talking about company announcements, but it feels as though the bad news has been coming in terms of the geopolitics and macro situation.
Obviously, first of all we had the global pandemic which had the effect of significantly disrupting supply chains, which in itself was quite inflationary as we ended up exiting the pandemic.
But obviously in February and March we saw the invasion of Ukraine by Russia which had a profound impact on a number of different levels but, from an economic point of view, very significant price increases from energy and again supply chains being disrupted.
Now as April has drawn to a close, we have the possibility of a third impact, being the arrival of more widespread coronavirus infections in China. Shanghai has been locked down for a number of weeks now, and there are concerns that Beijing may be forced to take similar steps. The consequence of this could be significant for global supply chains and present a third, and very unwelcome, macroeconomic disruption which has the potential to be inflationary again.
Now the reason to mention all of this is that stock markets have been reeling under these pressures throughout the course of April, down about 8% in US dollar terms over the month, and unfortunately what often happens at this time of year with the Q1 earning season is that investors’ attention focuses back on the company fundamentals.
But in the face of this macroeconomic bad news, investors have instead been somewhat distracted from the individual company announcements. Moreover, company management teams, although they’ve been able to report results which have generally been better than the market has been expecting, the focus has very much been instead on the outlook statements from companies. And given the amount of uncertainty and the fact that it’s so early in the calendar year, a lot of those outlook statements have left something to be desired, which has meant that there hasn’t been that sort of positive dynamic to equity markets over the course of the month.
However, we always need to look forward and I think as investors we’ve really been focusing on two things.
Firstly, our source of alpha, which we still very much believe in. We would observe that in the current amount of volatility that we’re seeing in markets, investors have been focusing very much on the short-term, particularly on tangible value and short-term cash flows, and ignoring a lot of those longer-term or intangible drivers of long-term value creation. Out of sight is out of mind, so to an extent the fact that they have been overlooking these sources of longer-term value creation, that, to our mind, means that there seems to be significant amount of opportunity of under appreciated alpha latent in a lot of these great businesses we try and invest in.
The second thing we’ve been thinking about is the risk profile of a portfolio, given it’s increase in heightened volatility. And we think it’s very important to maintain that discipline of having a well-balanced portfolio, for when the focus does settle down and re focuses again on those longer-term value drivers, it’s really important that the portfolio is well balanced and in a good position to capture that alpha when it starts to come through again.
I hope that’s been of interest, and I look forward to catching up with you again soon.