The confidence with which the year started, a new UK government with a working majority and a Brexit strategy in place (I wonder what has happened to those negotiations), all seems like a distant memory. So much for my contention that we were past ‘peak uncertainty’. Everything changed over the last two weeks of February, as the realisation dawned that the coronavirus had got out of China and quite how virulent it was. 
In our January report, we suggested that it was getting harder to find value and that the relationship with underlying corporate earnings was right at the top of the range (outside recessions). Going on to suggest that, without a marked improvement in earnings, a ‘pause to refresh’ was in order. Well, we have the recession in short order and stock markets collapsed in a manner to rival 1987’s crash. In particular, the third week of March saw genuine panic of a type that we haven’t seen for a while with indiscriminate selling and violent price swings – exacerbated by the wretched ETFs.
I would like to add that we are not in panic mode, this is ‘what we do’. This sort of volatility provides plenty of opportunities and we have been extremely busy. We aim to concentrate on the underlying companies, what price are we being offered partial ownership of great businesses, and not concern ourselves with endless prognostications from pundits. I have no desire to give false hope as to how long this might last, it could easily get worse yet, but experience has taught us the value of sticking to our principles and the discipline of good investment and risk management.
Stock markets did appear to be settling into a more rational frame of mind over the past two weeks with a rather clearer focus on the long-term winners and losers from the current crisis though clearly, we are heading into a sharp recession. Considerable short-term damage has been done to economies around the world and economists are sounding gloomy (as is the BBC!) with the International Monetary Fund having declared that the ‘Great Lockdown Recession’ will likely be worse than the Great Depression; in reality they are as much in the dark as the rest of us.
As yet, we have no clear idea how long all of this will last. The good news is that central banks have acted swiftly and decisively to prevent this becoming another financial crisis, the speed with which they acted (much more quickly than during 2008/9) is commendable and on, effectively, an unlimited scale.
After a shaky start, governments have also rowed-in with appropriate direct measures. I have been impressed with our new Chancellor of the Exchequer, Rishi Sunak, who appears to have a good grasp of what is required. Sadly, president Donald Trump appeared to be in denial for several weeks, which will only make the American epidemic worse.
Overall, the support packages from governments worldwide really are on an unprecedented (a much-overworked word at the moment) scale. This will require government borrowing on an equally grand scale but, for the moment, it is the correct thing to do.
I am quite sure that we will not hit the bottom in a number of the stocks we hold but experience has taught us that we must build positions when all around are fearful, it will be too late by the time we are all relaxing again.
We increased our equity weighting at the beginning of March. Among the direct investments, we have been focused on building or adding to positions in higher-quality companies, which we feel are the most likely to return to favour and the least likely to suffer lasting damage from the inevitable economic slowdown that is coming.
Equally, we increased our cash holdings at the same time. Cash is the best diversifier and insurance in febrile markets when there is the added risk of disruption and illiquidity in the marketplace.
As I said above, we do not wish to peddle any soothing nonsense as to a recovery from this malaise (in the country and the markets), we don’t know how long this will take.
It is a time to ‘stick to our knitting’ and begin to look forward to what might change on a more permanent basis.
James Mahon is co-manager of the Church House Tenax Absolute Return Strategies fund. The views expressed above are his own and should not be taken as investment advice.