The title of our recent quarterly letter was “Only Strong Swimmers Should Enter These Waters.” At the time we were happy with our 10% plus cash position and felt that with valuations high, that markets were complacent and vulnerable to a shock. The coronavirus is such a shock. Our hearts go out to those affected by the Coronavirus.
The coronavirus, and its impact on global markets, is an unanticipated event. For Bourgeon, this represents an unquantifiable short-term risk whose ramifications at this point are truly unknown. While there are many potential theories about the future, we have tried to focus on recognized experts and verifiable sources of information. We realize that over the short-term the coronavirus will likely create volatility in markets, but we also have ample cash and believe in the long-term growth potential of the markets.
History has demonstrated that markets sell-off until virus cases peak, as shown by SARS in 2003, and Ebola in 2014. A big difference between now and the SARS outbreak is that Chinese travelers have grown from 14mm annually to 168mm. In addition, one should expect a higher rate of transmission due to high speed trains, the initial impact in Wuhan, a city of 10mm that is a transportation hub of China, and higher travel rates due to the “golden week”. Although some have postulated the virus peak to be around mid-February, the reality is that we will only know the peak infection rate in hindsight.
The good news, from a health perspective, is that countries are meeting the health crisis with a strong response. The bad news, from an economic perspective, is that the short-term economic impact could be severe. Many multinationals have closed businesses, airlines have halted flights to mainland China and many provinces have been shut down. That will not only severely cut growth in China but will also slow down the worldwide economic recovery that had shown itself through various green shoots over the last few months.
With some stock prices down as much as 25% from recent highs, we are actively reviewing our investments and looking at many potential opportunities to add to existing holdings or new long-term investments. We have a strong belief in our companies because of their strong management teams, excellent cash flow, and good long-term earnings growth potential. While the coronavirus will dominate the news headlines near-term, in the end, economies should grow, and equities should outperform over the long-term.
Our goal, as well as our mission, is to protect your capital long-term with good risk adjusted returns. We feel confident that we can deliver on that goal for you. We look forward to speaking with you soon and thank you for entrusting us with the management of your money.
Bourgeon Capital's Market Insights