Peak Uncertainty: What Investors Should Do Now
By James Cakmak and Ryan Guttridge
We are in a period of peak uncertainty. Massive tsunamis of unknowns are coming ashore and no one knows the amplitude of the waves. Oil is crashing, the VIX is soaring, and market swings are breaking circuits.
What’s important to remember is that maximum unknowns are a prerequisite for a market bottom. It’s the point at which everyone agrees they don’t know what to do. Frankly, treasury bonds don’t collapse 70% in a month when there’s any level of certainty.
Peak uncertainty is a good thing because typically the bottom is in sight.
There are two questions that investors need answered. First, is this a crisis on par with the 08/09 Great Recession? Second, what do investors do now?
Is this a crisis on par with the 08/09 Great Recession?
Here’s what we know:
> High yield bond spreads approaching recession territory
> Widespread awakening to the downside of our dependence on China
> Disastrous year for earnings, most likely down versus 2019
> Fear (measured by the VIX) at levels surpassing the dotcom bubble
> Awe-inspiring collapse in treasury yields
Bottom line, it’s an unforgiving backdrop.
The corporate bond markets are another source of potential disarray. It’s fair to say no one truly knows how bad it can get for corporate fixed income. However, the reality is that debt instruments are less of a burden than prior periods of systemic failures given the low interest rate environment. Debt is simply a lot cheaper than before. Nevertheless, we acknowledge there is a bottleneck of low investment grade bonds under review by rating agencies.
China, the culprit behind all of this, appears to have largely contained the pandemic. This is evidenced by the stability in the Yuan and Chinese stock markets relative to the free fall experienced elsewhere globally. If these markets can be trusted, it’s a sign COVID-19 has peaked within China’s borders.
We shouldn’t be surprised by the volatility or amplitude of swings in the VIX, because, after all, the world is more connected than ever before thanks to technology.
Yes, many unknowns remain related to the degree of containment measures the US will have to take compared to China, the sharpness of the economic slowdown, and knock on effects to the bond markets. However, at this point it appears that the majority of the impact will be largely limited to overall earnings.
If you assume 2021 S&P earnings get back to 2019 levels, this implies a market multiple of approximately 17.5x. Given the current interest rate environment, the equity markets look relatively attractive.
What do investors do now?
During times of great market and economic uncertainty it’s critical to identify trends that will persist despite the overall circumstances.
In 2008, it was obvious that e-commerce was going to grow, smartphones were going to be of increasing importance, and online advertising would take share. After all, we had four trillion-dollar companies emerge from the Great Recession.
No matter what happens economically or financially, businesses will always evolve to take advantage of new technologies. The key now is to identify companies that either create the new technologies or take advantage of them.
So, what are these themes today? Here are the ones we think of as 5G/AI/Cloud proliferate and supply chains return home:
> Productivity explodes higher in manufacturing through automation
> Vehicle markets become increasingly electrified in some capacity
> Workplaces expand decentralized operations
> Consumers have greater financial efficiency/control through fintech
> E-sports and gaming capture mindshare versus traditional media
The commonality among these trends is that they all revolve around time. More specifically, what saves people time, what saves enterprises time, and what improves the quality of time. Companies will accomplish these tasks independent of the current economic picture and whatever path COVID-19 takes.
The internet’s last chapter was about connectivity. The next chapter is about productivity and the broader sharing of benefits across society.
This theme of tech has led the way before, it will do it again this time around.
Clockwise Capital is an asset management firm with a private equity approach to the public markets. We focus on the meaning of time and the role it plays in people’s lives. We believe the essence of a great investment resides in the ability of a company to either save their customers time, or improve its quality. We understand how technology evolves to drive these two factors, which we believe define human progress. As a result, we search for securities with cyclically depressed valuations whose companies save time, thus using secularly advantaged industries to build a concentrated portfolio. With each series of investments our goal is to optimize edge, maximize return, while also minimizing correlation. This allows our portfolio to maintain a liquid, low duration fixed income balance, ready to capitalize on market volatility, while still generating market beating performance.
