Janus Henderson Investors: Coronavirus - finding a path through uncertainty

Key takeaways:

• Major central banks have moved to support the economy during the COVID-19 crisis with
  huge stimulus packages and interest rate cuts.
• Given the general unpredictability, it seems right to emphasise capital preservation and defensive strategies until the fog of uncertainty begins to lift.
• The Balanced team is focusing on its dynamic allocation and active equity and fixed income process to manage through the current market volatility.

At the time of writing on 17 March 2020, the US Federal Reserve (Fed) has allocated an astonishing level of funding (more than $1 trillion US dollars) in an effort to help ease strain in the economy. Still, the S&P 500 Index is down more than 25% YTD thus far[1].

As has been the case historically, the Balanced team is focusing on its dynamic allocation and active equity and fixed income process to manage through the current market volatility. As COVID-19 continues to spread around the globe, with markets reflecting the obvious uncertainty and distress, the strategy has been actively moved to a more defensive stance:

• Reducing equity exposure
• Reducing credit (corporate bond) exposure
• Within the fixed income sleeve, the strategy has tilted towards quality, favouring more defensive fixed income asset classes such as US Treasuries and Agency MBS (mortgage-backed securities issued by government-related agencies). Duration has been increased.

The strategy is designed to maintain liquidity within the fixed income allocation, which may provide an opportunity to take advantage of market dislocations as and when that seems appropriate. Meanwhile, the fixed income sleeve continues to serve as a ballast to the overall portfolio, providing diversification against equity market declines.

It is worth remembering that the Balanced strategy has always been managed with a focus on trying to mitigate potential volatility, where possible, ideally giving investors an opportunity to invest through difficult market environments and multiple economic cycles.

We expect the flow of news to be intense over the next few days and weeks, as the outbreak in the US and elsewhere develops, as the oil price war progresses, and we see further stimulus measures from central banks around the world. This is a very dynamic situation. The impact of a virus on this scale is unprecedented in modern times, and the path it takes, and how governments and businesses may react, is uncertain.

Encouragingly, we have seen companies picking up their activity in China, retail firms and factories re-opening; and supply chains reconnecting, which we see as a positive sign. To a lesser extent, early noise around the US presidential election later in 2020 has also added to recent market turbulence, specifically the Democratic Party primaries.

Given the general unpredictability, we believe it seems right to emphasise capital preservation and defensive strategies until the fog of uncertainty begins to lift. We continue to focus on companies benefiting from secular tailwinds that we believe can thrive amid uncertain economic conditions. As always, the strategy is focused on companies with robust free cash flow, healthy balance sheets and sustainable earnings models. In our view, it is these kinds of companies that can show resilience, and potentially emerge from this volatile period in a stronger relative position.

We will continue to monitor the situation for permanent impairment of long-term growth, but as of now we see minimal change to the outlook for our holdings. As we move forward, we will continue to look for attractive entry points to build new positions or add to existing holdings.

[¹]  Source: Refinitiv DataStream, 31 December 2019 to 17 March 2020. Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise, and you may not get back the amount you originally invested.