International markets in an uncertain world

Dan Delany and Matt Scherer
April 17, 2020

How are international markets behaving in this uncertain world? Our International Growth Strategy team shares their insights on global markets in the current environment.

After a positive start for international markets in January with the signing of a Phase I trade deal between China and the United States, the novel coronavirus prompted a steep sell off in equity markets around the world.  Investors are faced with unprecedented uncertainty surrounding the impact of the virus on economies and corporate fundamentals.   Intensifying the uncertainty is the media coverage of both the progression of the virus and its market implications.  The uncertainty has produced negative market returns previously unseen in such a short period of time. The MSCI All Country World Index (ex US) was down 23.4% for the quarter, the MSCI Emerging Markets Index was down 23.6%, and the S&P 500 was down 19.6%, again besting international markets.

Managing stock portfolios is especially challenging during these volatile periods. The situation is quite fluid right now and to the best extent possible, we try to ignore the media frenzy and deal in facts.  For our investment team, facts are comments directly sourced from our companies’ senior management teams.  As such, we are spending our time getting them on the phone to develop an informed and objective view. We have talked to over half the companies in the portfolio as well as several companies on our watchlist. Our focus has been on their COVID response, balance sheet strength, and understanding the mix of sales which have been lost vs. delayed.  With that in mind, here are some anecdotal comments.

  • China has started to turn the corner and life is getting back to normal in a measured way.
    • Traffic and pollution (sadly) are back to 2019 levels in Beijing, however, subway traffic is still highly depressed as social distancing policies remain in place. 
    • We talked to one of the largest restaurant companies in China.  They had closed 30% of the stores and saw same store sales down over 70% at the peak…. Right now, they are back to 95%+ open and comps are -20%.... Not good, but a lot better. 
    • The MSCI China A Index performed better than global markets, down 9.2% for the first quarter.
  • Europe is tricky with different responses and divergent healthcare systems.
    • Obviously, Italy and Spain are the hardest hit, but the International Growth portfolio does not have a lot of direct exposure there.  We spoke with one of Spain’s largest banks and with the ECB loan guarantees, they were surprisingly constructive.  
    • When considering the rest of Europe, we are looking for some franchise names to add to the portfolio. In Europe, there is a scarcity of high-quality growth companies which often results in premium valuations relative to global peers. We hope to use this drawdown to add a stock from our watchlist.
  • On valuation, our quant screening process has always used a trailing earnings metrics as one input.  That has been helpful as we consider 2019 earnings, a mediocre economic year, as a measure of basic earnings power for many companies.  From there, we adjust for a potential long-term impact from the shut-down.
  • Almost all of our calls have been surprisingly constructive.  We think this speaks to the quality characteristics of the companies we focus on.

It is not unique to expect continued volatility and uncertainty. However, we do think investment performance will diverge between those managers who make trades to feel “in control” and those who invest based on facts and strong fundamental research. Our team is working hard to speak with companies around the world to formulate our investment thesis and portfolio adjustments. If you would like to hear more, please feel free to contact us.

 

Dan Delany and Matt Scherer
Co-Portfolio Managers
CIBC International Growth Strategy

 

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