The sudden fall in equity markets in late February continued over the first two weeks of March driven by the unprecedented global nature of the pandemic and the relatively high valuations of stocks at the beginning of the year. At the low point in the month the European markets had fallen more than 35% in just 4 weeks. The speed of the decline was remarkable compared to previous bear markets with even the ‘Great Financial Crisis’ of 2008 taking almost a year to push markets down a similar amount. However, Europe was by no means exceptional in the recent fall, and as more and more countries put their economies on hold, we saw reactions from investors across all regions and asset classes.
Recently, ex-Fed Chairman Ben Bernanke argued that the virus impact will be more like a “major snowstorm or a natural disaster than …depression”. If he is right, then we should expect a relatively rapid rebound once the outbreak is controlled. Looking back at recent disasters (such as the Japan 2011 earthquake, Haiti hurricane in 2010 and the 2005 Asian tsunami) we find that sharp initial losses were typically made up after a few quarters. The pattern of growth around the 2003 SARS outbreak was similar – a big initial slump then a very strong recovery.
Our baseline scenario, given the extent of both fiscal and monetary containment measures in many countries, is therefore one of rapid and deep recession, followed by an equally rapid recovery. The first forecasts by the IMF point to very significant declines of around 7.5% of GDP across Europe in 2020, concentrated in the first half of the year, followed by a strong recovery of 4.5% in 2021. Translated into profits for 2020, this supposes falls from 20% to 40% according to the sectors and companies, followed by increases in 2021 of a similar order to leave them, over the two years, slightly below the level seen at the end of 2019. While the current focus is rightly on each company’s ability to withstand this period of lockdown, once the pandemic recedes, the market will begin to focus on the expected results of 2021.
As for the Columbus portfolio, we entered the crisis with somewhat higher cash levels than normal (around 13% of NAV). We have spent several months with no exposure to some of the more cyclical sectors (oil, raw materials, autos), including very little exposure to banks and other financials. We continue to be positioned in companies where we see better returns for lower risk, especially in technology, consumption and services. We have taken advantage of the fall to add to previous holdings and to take positions in securities in the infrastructure sector which have seen dramatic falls, but where the longer-term potential remains undiminished. We believe that the recovery will not be uniform across all sectors and that it will continue to focus on quality companies with healthy balance sheets and controlled levels of debt. To the end of March the Columbus Fund fell slightly less than the MSCI Mid Cap and IBEX indices, and slightly more than the STOXX600 as we would expect given the mid-cap focus. The fund performed well during the bounce in markets through the latter half of the month and we are confident that we are well placed for when the true recovery comes.
We thank your trust and wish the best to you and your families during these uncertain times.
Since June 14, 2018 both domestic and foreign investors have been able to access the Columbus strategy via the master-feeder structure between the Columbus 75 Sicav in Spain (feeder) and the Luxembourg registered Pareturn GVC Gaesco Columbus European Midcap Equity Fund (master). The Luxembourg vehicle offers both institutional and retail share classes.