Why we are optimistic: “Notes from the frontlines”

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Calamos Global CIO Nick Niziolek shared the following optimistic investment commentary late today. Nick discusses the factors setting the stage for a very strong 2H recovery in the economy.

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What we are seeing: A Strong 2H Recovery

We are writing to share with you what we are seeing in the various markets we invest in around the world. The situation is very fluid with new information coming in real-time, but this is what we know now. We remain optimistic that the impact we are seeing today is transitory and that aggressive monetary easing and fiscal response will set the stage for a very strong 2H recovery.  As a collective market, we likely underestimated the complacency-turned-panic scenario and it is not yet clear the bottom is in (although we are optimistic we are close).

Glass Half-full:

  • Many datapoints confirm the recovery we are seeing in China. While the reliability of the data coming out of China is always a concern, there are enough anecdotal datapoints to suggest supply chains are coming back online. This can reduce the “supply-shock” risk that would be very difficult for global central banks/governments to combat. China is re-starting their basketball league after being shut the last two months (we are obviously on the front-side of this in the U.S., but a potential playbook to think through how long this could persist in the U.S.). Daily new case counts continue to decline to a very low number most recently.
  • Korea remains an optimistic datapoint for how a developed market without the command-control style government of China was able to combat and recover from this outbreak. The outbreak peaked late last week and we’ve seen several days of reduced infections. This week we saw disappointing news that a new cluster has been identified at a call center in Seoul, but South Korea has been the leader in testing for this virus (with more than 200,000 tests already completed) and the datapoints coming out of SK are encouraging.
  • There have been very few cases reported in the Southern Hemisphere. There have been several reports noting that transmission levels are much different in climates above 70% humidity versus below.
  • Vaccines/treatments are being worked on. Likely still months/year away, but there are reports that China has taken corporate intellectual property and is already performing human trials that are going well. It’s not good that IP may have been stolen or that humans are being tested, but the results are positive.
  • Education, social-distancing, hygiene are all basic ways to combat this virus. While disruptive, the steps being taken will arrest this virus’s spread. We expect more work from home announcements, school closures, and event cancellations. This will have a significant positive impact on arresting the spread of this virus, but will obviously be disruptive.
  • Central Banks remain accommodative, more importantly fiscal support appears to be on its way. Many economies came into this crisis on a relatively stronger footing.

Glass Half-empty

  • The unknowns remain unknown. Leadership is exhibiting “over-confidence” while the media is reporting on this event like it is the plague. This is supporting a very significant demand-shock, with timing of a resolution not yet clear.
  • Italy remains a concern and Europe is seeing significant spread as well. We are probably several weeks away from peak infections on that continent.
  • While stocks have become cheaper, valuation alone does not provide sufficient support. We see considerable upside for most of our portfolio, but valuation is not yet “too-cheap-too-ignore.”
  • Starting to see liquidity concerns. Credit lines being drawn, credit market tightness, U.S. Treasury markets, ETFs and discounts to NAVs, etc.

2H Economic Recovery? How We Are Positioning

  • We entered the year with optimism for the path of the Global Recovery we were beginning to see. Our portfolios came into this period with a healthy overweight to secular growth companies, moving toward more equal-weight cyclical growth to capitalize on the recovery we anticipated, and an underweight to defensives. This was the right mix in our view as our portfolios outperformed last year and in the first two months of 2020.
  • We did not anticipate a coronavirus outbreak. But we’ve always said that the best portfolio managers don’t predict these types of events—but they know how to adjust to new information that has been presented. We utilized some of the initial complacency we were seeing to build cash balances across the portfolios, layer in put protection where appropriate, and consolidate around some of our “best ideas.” The result is that the portfolios were able to participate in the strength we saw in the first weeks of the year, and provide some relative resilience during this correction. Most importantly, we have cash ready to put to work to take advantage of the recovery we expect to unfold during 2H20.
  • My current expectation, although I’ll let the market and data confirm these views, is that the sell-off/wash-out we are seeing in global equities will likely result in new leadership on the other side of correction. We are seeing certain overseas markets outperform the U.S., and the combination of lower rates, lower oil prices, accommodative monetary policies, and increased fiscal stimulus—coupled with very attractive valuations—likely supports a rotation toward cyclical growth and select overseas equity markets as the year unfolds. When this passes, I believe the recovery is going to be very strong and I remain optimistic that we could still see positive returns in global equity markets for 2020.

Conclusion

Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. The views and strategies described may not be suitable for all investors. References to specific companies, securities, asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to buy or sell. Investing in non-U.S. markets entails greater investment risk, and these risks are greater for emerging markets. The above commentary for informational and educational purposes only and shouldn’t be considered investment advice.

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About the Author

Jacob Wolinsky
Jacob Wolinsky is the founder of ValueWalk.com, a popular value investing and hedge fund focused investment website. Jacob worked as an equity analyst first at a micro-cap focused private equity firm, followed by a stint at a smid cap focused research shop. Jacob lives with his wife and four kids in Passaic NJ. - Email: jacob(at)valuewalk.com - Twitter username: JacobWolinsky - Full Disclosure: I do not purchase any equities anymore to avoid even the appearance of a conflict of interest and because at times I may receive grey areas of insider information. I have a few existing holdings from years ago, but I have sold off most of the equities and now only purchase mutual funds and some ETFs. I also own a few grams of Gold and Silver

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