During short periods of stress, the stock market focuses mostly on speculation. It also puts pressure on long-term owners. Then it is reassuring that Neox portfolios with quality companies often go stronger than the stock market both when stock market falls and during recoveries, and provides best return in the long term. We do however not want to speculate on how long-term the stock market turmoil may last. Neox portfolios continue to outperform corresponding benchmarks by 7-8 percentage points so far this year. During January-February, the portfolios benefited from strong reports from the majority of our quality companies. Even during the stock market pressure in March, the portfolios hold up in a convincing way.
The reason is that the stock market keeps quality companies for longer even when the stock
market is under pressure. When the stock market returns and recover again, quality companies
are favored even more.
So, what does our analysis of today’s stock market climate say? Every day we analyse 6 million stock market data. There are currently no serious signs that the companies suddenly deserve 1/4 lower value. Instead, it is the view of the outside world that has changed.
The reason is known. A temporary virus has surprised the world. First we noticed a production concern in China, when factories were closed. Once the virus reached Europe, the focus was more on consumer concerns. Airlines, hotels and entertainment companies are temporarily closed. But the event should not fundamentally change the perception of the world’s business as much as the stock market in the days. What we are seeing is not revaluation, but pure short-term speculation. And speculation usually lasts a short period. Once the long-term approach returns, the equity prices become both calmer and stronger. And most of all for the benefit of quality companies.
The picture of the viral turmoil is now also beginning to clear. Developments in China show that the number of new infected culminated already after about 12 days. In South Korea, the infection also peaked after about 12 days. In Italy, the development is more unclear. After 16 days, they have still not passed the peak.
As far as we know, the performance of European and US listed companies in January and February was not affected. Thus, 2/3 of the reports of the year are in safe harbor. It is the business during March and April that can be affected. Of course, they may be worse than previous forecasts. But the effects need not be more long-lasting than just that. Can Europe now look forward to the same rapid culmination as in China or South Korea, the effects should not be as dramatic as stock prices give the appearance of.
Politicians and central banks have also reacted. This is positive for pressured employees and
companies. But the virus cannot be bought away with lower interest rates or quantitative
easing – we have to wait out the virus. The picture of the pandemic is also beginning to be
clearer every day. Initially we knew very little, so it was no wonder that the stress affected
the stock exchange. Today we know much more about the effects, care and cures of the
virus. The more data we get from countries such as China, South Korea and Italy, which were
the first to suffer, the better the picture we get of the future stock market. Then we know
that quality is what counts first and foremost in the companies. And then we know once
again that Neox’s strong focus on quality companies tends to pay off more than well.
Or as Warren Buffet usually refers to in situations of stock market stress:” We buy businesses, not the stock market. Long-term outlook for business hasn’t changed. You can’t predict markets on daily headlines. Quality businesses will do great in long term”.