Hedging My Virus Bets
After last week’s horrendous losses, I spent the entire weekend reflecting, thinking and analysing the macro picture.
This led me to two conclusions:
1. A more than 40% weighting in one share is inappropriate
I discussed my largest holding and highest conviction position RockRose Energy last week. If you’d told me that RockRose could trade at more than a 20% discount I’d say that was impossible – well it’s not. RockRose was moving in tandem with the oil price, with little regard for the balance sheet. At more than 40% of my portfolio, I realised that I’m not willing to accept that level of risk.
2. Deflation could be coming
I believe that China’s disruption to global supply chains could cause deflation.
China’s factory index hit record lows:
I would characterize China as the manufacturing hub of the world. If companies can’t source parts, then finished goods can’t be shipped.
Jaguar Land Rover stopped manufacturing the I-Pace for a week due to battery shortages. JLR warned this is an issue for the entire automotive industry. Even if people want to buy your cars they can’t.
JLR will survive, but what about all the SME’s that supply parts? If they don’t have decent balance sheets, they could be in trouble. And if you were a worker on one of their production lines – fancy booking a holiday or making a large purchases at the moment? I think not.
There is evidence that consumer spending is reducing. A former LVMH executive described the coronavirus as a disaster (LVMH own brands like Louis Vutton, Marc Jacobs and Hublot).
Consumers are acting irrationally and buying loads of hand gel – normal soap works fine, readers!
A colleague wants to go to Vietnam. He’s booked the time off but is holding off booking flights to see how things develop.
Airlines are cancelling hundreds of flights due to dropping demand. Airlines are notoriously fragile – it wouldn’t be surprising to see a few go bust. EasyJet cabin crew – fancy a new car on finance? I thought not.
In Japan, schools are closed. How does an economy perform with its schools closed? I suspect it doesn’t boost output, but you never know.
I’m in danger of sounding like a massive bear whilst there have been some positive events for markets.
Central banks are panicking and bringing out their party tricks (print some more money!).
- Bank of England – “The Bank is working closely with HM Treasury and the FCA [Financial Conduct Authority] – as well as our international partners – to ensure all necessary steps are taken to protect financial and monetary stability,” a spokesman said.
- Bank of Japan – “The Bank of Japan pledged to use whatever instruments necessary, including injecting money into the market, to ward off the effects of the coronavirus”.
- Italy – “Italy will inject €3.6bn into its economy to mitigate the impact of the largest outbreak of coronavirus in Europe as policymakers around the world consider the consequences of transport and supply disruptions resulting from efforts to contain the disease.”
The market is already pricing in expected rate cuts from the Federal Reserve and expects that OPEC will cut production in their upcoming meeting this week.
Given all of the above, I’m more comfortable holding a 20% cash position. If I’m wrong and coronavirus doesn’t reap economic carnage, I’m still 80% long and will benefit. If I’m right, I want to have some cash on the sidelines to deploy should we be entering a recession.
My thesis is that no amount of money printing can make up for missing goods, disrupted supply chains and panicked consumers, at least in the short term. I’m still positive about growth and the economy in the mid to long term – the sun will rise and life will go on regardless.
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