Author: Joanne Frearson
The assumptions that Fraser Lundie’s, CFA, Head of Credit at Hermes, team made about investments a few weeks ago, may not be relevant today as market functioning deteriorates in the wake of the coronavirus crisis.
Lundie thinks there is a huge amount of dislocation in the markets especially in fixed income. “We don’t know at this point on the fundamental side just how long or bad things are going to be and the range of outcomes are still very broad,” he says.
Liquidity in the market has not been able to keep pace with the velocity of its moves over a short period of time, he explains and there has been a lack of functioning in them.
“People have been selling what they can rather than what they should,” says Lundie. “Some of the rational behaviour you would normally expect from investors has just not been possible. It involves quite a lot of thinking on your feet and reacting quickly to the evolving circumstances.”
Lundie believes it is important for investors to recognise their own behavioural biases when thinking about buying and selling positions in their portfolios.
“Ultimately there will be survivors and those survivors are likely over the medium to long-term to be in a stronger position in terms of their competitive landscape, than they were coming into this,” he says.
But Lundie thinks to find these survivors may not be so easy and investors will need to think out of the box to pick them.
He says: “It is probably going to involve making decisions based on assumptions, which were miles away from assumptions that you might have had a few weeks ago.”