Geopolitical Events & Fear: Continued…. Pandemics
We have been writing and studying Geopolitical events since the start of the year as they have been taking headlines in the regular and financial press (presidential impeachment, middle east crisis, COVID-19 pandemic risk etc.). We have previously noted that, while we pay particular attention to these events, they do not drive our investment management process. This week, we write about Pandemics. Fundamentally, we believe that Pandemics have a more economic risk because of the potential for broad slowdown in overall economic activity which is what typically causes a recession. Current events readers will note that with COVID-19, China has implemented extreme quarantine measures, isolating 60 million people. This has resulted in stalled manufacturing activity that has impaired global supply chains. The result has been a decrease in products sold, a drop in GDP and a potential increase in unemployment. If this were to happen for an extended period of time, a recession would ensue. Financial markets anticipate this, and the result is “drawdown”. Readers will note during this past weekend market participants and the press are finally paying attention to this risk.
- Figure 1 presents Pandemics events. From the data, we cannot see any type of general investment strategy for trading against Pandemics, other than just ignoring them. Indeed, for the most part there is limited drawdown and an almost immediate recovery.
- As was similar with previous data, international markets faired twice as worse on average than North American markets but rebounded equally after one year. Again, for essentially all events, the one-year return was positive.
“This means that” we would draw the same conclusion as our other reports: “We do not spend much energy trying to manage our portfolios for this type of risk, as the opportunity cost from mistiming the events could be very large”. However, with respect to Pandemics, there is the real possibility that a severe long-term Pandemic could impair the value of our portfolio companies. So, from a fundamental perspective (not a trading perspective) we would be concerned if a Pandemic takes hold and causes companies to cease operations for an extended period of time. However, while the human cost would be terrible, the financial damage appears to be transitory. Even with the Spanish Flu, where an estimated 50 million people died over 3 years, the economy and financial markets ultimately recovered in each of those three Pandemic waves.
National Instrument 31-103 requires registered firms to disclose information that a reasonable investor would expect to know, including any material conflicts with the firm or its representatives. Doug Johnson and/or Pathfinder Asset Management Limited are an insider of companies periodically mentioned in this report. Please visit www.paml.ca for full disclosures.
*All returns are time weighted and net of investment management fees. Returns from the Pathfinder Partners’ Fund and Pathfinder Real Fund are presented based on the masters series of each fund. The Pathfinder North American Equity Portfolio and The Pathfinder North American Income Portfolio are live accounts. These are actual accounts owned by the Pathfinder Chairman (Equity) and client (High Income) which contain no legacy positions, cash flows or other Pathfinder investment mandates or products. Monthly inception dates for each fund and portfolio are as follows: Pathfinder North American Equity Portfolio (January 2011), Pathfinder North American High-Income Portfolio (October 2012) Pathfinder Partners’ Fund (April 2011), Pathfinder Real Fund (April, 2013), and Pathfinder International Fund (November 2014).
Pathfinder Asset Management Limited (PAML) and its affiliates may collectively beneficially own in excess of 10% of one or more classes of the issued and outstanding equity securities mentioned in this newsletter. This publication is intended only to convey information. It is not to be construed as an investment guide or as an offer or solicitation of an offer to buy or sell any of the securities mentioned in it. The author has taken all usual and reasonable precautions to determine that the information contained in this publication has been obtained from sources believed to be reliable and that the procedures used to summarize and analyze such information are based on approved practices and principles in the investment industry. However, the market forces underlying investment value are subject to sudden and dramatic changes and data availability varies from one moment to the next. Consequently, neither the author nor PAML can make any warranty as to the accuracy or completeness of information, analysis or views contained in this publication or their usefulness or suitability in any particular circumstance. You should not undertake any investment or portfolio assessment or other transaction on the basis of this publication, but should first consult your portfolio manager, who can assess all relevant particulars of any proposed investment or transaction. PAML and the author accept no liability of any kind whatsoever or any damages or losses incurred by you as a result of reliance upon or use of this publication.