Note March 6, 2020 – Best of Times and Worst of Times : The DJIA has dropped precipitously while swinging by several hundred points a day in late February/early March 2020. This behavior has scarcely been an exception among equity markets, worldwide. On a best of times and worst of times basis, it is appropriate to consider the role of risk premiums. This facet also applies to now ultra- low fixed income yields, not least on momentum. However, credit risk in sovereign and corporate issues alike seems elevated. In many ways we see as a red herring, claims that risk is binary and therefore hard for markets to incorporate. It is an art, not science even amid a plethora of data. Risk premiums are not about being clairvoyant on specific risk, such as Covid-19, but more about recognizing that unknowns do and have flared in the history of finance. We see these aspects as having driven Benjamin Graham in the valuation of securities in the late 1930s on and driven Paul Volker in the exercise of central banking in the late 1970s onward. Modern markets and authorities may be mistaking the plethora and volume of data with accuracy in assessing impact. We believe markets now to y be re-calibrating their erstwhile excess focus on central bank policy as a driver mitigating risk. Capital market volatility will likely remain high for economic and political reasons. Equity markets may be closer to fair value but are still not inexpensive, recent pullbacks not withstanding. Psychologically, the presence of despair is still absent as is the stripping out of excessive euphoria that has often marked a meaningful bottom amid business change. We would look for better balance between value and momentum market tactics. In business, it involves changes in logistics by companies by more investment into more diversification of manufacturing. It would mean better market performance in the business of industrials compared to the long dated prior cycle leadership of consumer areas in emerging and advanced economies alike. Financials are likely to be crucial components in the markets which is would likely to continue recalibration of their asset standards. It probably would mean still further casualties among the weakest financials as currently being seen in Europe and Asia. It would also mean greater risk premiums being attributed to junk bonds This would likely also means stress amongst those portfolios that stretched for yield in this cycle such as via leveraged finance instruments. Even if the present fears of the impact of Covid-19 are excessive, further central bank easing may be politically necessary but its efficacy is likely suspect. We espouse diversification including above benchmark cash and precious metals. Currency volatility remains a risk to consider, despite having been latent in the G-7 era of ultra-low administered rates. As well, a quality balance sheet and business tilt seems appropriate across sectors and in geographic allocations in capital market holdings. Both overall and by region, global economic growth expectations have steadily been dropping in the last several months by both official and private sources. Most recently in the midst of Covid-19 health fears leading to isolation, global GDP growth expectations have dropped towards 3% and less, even towards 2 ½% reportedly by the OECD, loaded into early 2020 with more recovery in 2021. Even if some of the extreme slowdown fears do not come to pass, these expectations appear meaningfully lower than market buoyancy and complacency seemed to incorporate, even as recently as January/February 2020. Such changes would have have both political and business ramifications that could unfold. During times of sudden change or reality at variance with market assumptions, central banks do have to move for cosmetic reasons, to inspire general confidence and separately to counter political pressures. We put the March 4,2020 Fed Funds rate 50 basis point reduction by the Federal Reserve and cuts by several other central banks, including the Bank of Canada and the Reserve Bank of Australia, in response to Covid-19 in this category. However, as Japan has discovered over three decades and as still seems present in advanced and emerging countries alike for the post credit crisis markets of today, a prolonged presence of zombie, extensively leveraged companies and subsequently weak financial institutions comes at a cost burden on efficiency and global competitiveness. We expect that while the last cycle was linked to business gain potential from an expansion of consumer demand often driven by leverage, looking forward currently for businesses at large, reviewing to boost efficiency of diversification by logistics and location of production may now stimulate many to focus capital investment more broadly in emerging and advanced economies alike. Beyond shareholders focused on earnings growth however derived, stakeholders are likely to be more demanding such as the populations in advanced economies or addressing climate change over the longer term. If so it would be beneficial for industrials over consumer areas at present valuations among the cyclical areas. In politics, inter and intra country challenges loom. Overall in emerging and advanced economies alike whether state or market driven, a sense of populist angst is present about the distribution of benefits from global growth over the last decade and more. On public finance management, there loom issues of budgeting and deficit management. On the latter, Greece was roundly criticized for not having restructured public finances during a period of low rates for it ahead of the flaring of credit crisis in 2007. Objectively today, the same challenges could apply for many countries even with a decade of ultra-low G-7 administered rates. For instance, the United States is targeted for trillion dollar deficits already and in an election year. Now accentuated by the Covid-19 fears but present before, confrontational political risk appears very much present in elections and political discourse not just in the United States but also within Europe and at the European Union level. The same holds true in Asian and African democracies. In addition, state dominated countries have to be cognizant of having to appear to have clear direction, even amid slower economic growth. While markets have in the prior cycle not been sensitive to political risk, we believe it could change going forward through 2020. In capital markets and finance, internal issues that could enhance volatility, appear to be not just ones of equity valuations. Despite ultra-low administered rates, also to be considered for issuing companies as well as the investment portfolios holding them, is the credit stability of leveraged loans and structure of balance sheets in case of unforeseen change. It could emerge for example whether in the form of lower revenue growth or higher interest rate costs. Some areas already have pressures despite low administered rates, for instance weak companies in the energy space have been demonstrating stress and recently in the rush to 12 month low fixed income yields, lower grade CCC securities appear lagging. It is likely that capital market volatility will remain high for economic and political reasons. In early March 2020, equity markets may be closer to fair value but are still not inexpensive, recent pullbacks notwithstanding. Psychologically, the presence of despair is still absent as is the stripping out of excessive euphoria that has often marked a meaningful bottom amid business change. We would look for better balance between value and momentum market tactics. We believe that in Q1/2020, capital markets have again had expectations reinforced of evergreen solace from central banks but which may be undeliverable. It lays the ground work for heightened volatility in 2020. In business, it involves changes in logistics by companies by more investment into more diversification of manufacturing. It would mean better market performance in the business of industrials compared to the long dated leadership in the prior cycle of consumer areas in emerging and advanced economies alike. Financials are likely to be crucial components in the markets which is would likely to continue recalibration of their asset standards. It probably would mean still further casualties among the weakest financials as currently being seen in Europe and Asia. It would also mean greater risk premiums being attributed to junk bonds This would likely also mean stress amongst those portfolios that stretched for yield in this cycle, such as via leveraged finance instruments. Even if the present fears of the impact of Covid-19 are excessive, further central bank easing may be politically necessary but its efficacy is likely suspect. We espouse diversification including above benchmark cash and precious metals. Currency volatility remains a risk to consider, despite having been latent in the era of ultra-low administered rates. As well as a quality balance sheet and business tilt seems appropriate across sectors and in geographic allocations in capital market holdings.