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The effect of OLZ investment principles in times of crisis

Reading time 10 minutes

The coronavirus has arrived in the Western world and is spreading apparently unhindered. Every day new numbers of infections and deaths reach us - the topic is omnipresent and increasingly affects our everyday life. Home office, event bans, travel restrictions or social distancing suddenly shape our lives. You could also call it a social and economic emergency stop.

All this is happening at a time when the global economy is already in a slump. Last year, for example, the world recorded its lowest growth since the financial crisis. Nevertheless, in mid-February, in expectation of double-digit earnings growth for 2020/21, numerous stock indices were still at historic highs. It was already clear at the beginning of the year: these high expectations make the markets fragile and susceptible to bad news. And then, unfortunately, the bad news became reality.

The emergency stop just mentioned nullifies these optimistic expectations. It is not yet possible to estimate how much and for how long the economy will suffer from the pandemic, but a more severe cooling is inevitable. This change in investor perception led to a general sell-off on the equity markets as early as February (more on this in our Insight). At the same time, safe havens such as government bonds, the Swiss franc and gold experienced brisk demand.

After this correction, the uncertainty was perfect. Volatility continued to rise and share prices continued to slide. To make matters worse, the oil dispute between Russia and the Organization of Petroleum Exporting Countries (Opec) escalated. The shock on the oil market (at times it was down 30%) exacerbated the already uncertain situation on the equity and credit markets. What followed was a wave of panic selling the likes of which we have never seen before. Around the globe, equity markets crashed. What was missing in February arrived in March: a clear rotation from cyclical to defensive stocks. IT, industrial, financial and, above all, energy stocks lost significantly, while the utilities and consumer staples sectors, for example, held up relatively well. It is slowly becoming clear that the high expectations can no longer be justified. Energy companies in particular suffered on the bond markets, whose credit spreads and thus the probability of default rose sharply. This in turn has high contagion potential for illiquid and risky investments.

OLZ's risk-based equity strategies were also unable to escape the negative trend, but as expected, the setback was clearly lower than that of the capital-weighted benchmark indices. Both the more defensive sector allocation and the optimized stock selection made a positive contribution.

The OLZ bond funds also had a stabilizing effect on mixed portfolios. The focus on high-quality debtors led to positive returns and thus to the desired "airbag effect" (more on this in our last research note). Once again, proof that even in a negative interest rate environment it pays off to be invested in government bonds with the highest credit ratings.

It has become clear in recent weeks that it is not without reason that we have been advocating the disciplined implementation of diversification principles, the segmentation of risk factors and the high importance of liquidity for years. The focus on returns often leads the investor into illiquid asset classes and thus into high vulnerability in times of crisis. 

In the case of long-term investments, it is essential to keep the damage within limits in such critical phases. At the same time, nobody can predict how long the market correction will take and how drastic the impact of the pandemic will be on economic development. The severity of the crash took everyone by surprise. If the situation returns to normal, this should in turn trigger a significant countermovement in the markets. In the long term, it is important to ensure that the portfolio is based on optimized diversification and strict risk management. To survive such extreme situations without existential fears and sleepless nights, it is also important to tailor the individual investment strategy to the investor's risk profile. We have always built our portfolios according to these principles and will continue to do so in the future.

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