Outlook for Second quarter 2022

GANGNAM-GU, South Korea - Amzeal -- Are we in a bear market and is it time to rebalance?

In a bear market we follow a five-step process:

• Take a deep breath, stay calm, and accept the uncertainty;
• Remember that your investment policy is your anchor to windward and has been developed with consideration of bear markets;
• Stress test portfolios to review sources and uses of cash;
• Rebalance; and
• When appropriate, seek opportunities.

In preview, governments, business leaders, and individuals are putting commerce on hold and disrupting supply chains, accepting the cost of a likely recession due to the curtailed spread of COVID-19. Markets have made recession-sized adjustments as the United States, Europe, China and South Korea re-emerge.

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We don't know how long or deep the recession will be, but expect it to be brief, provided measures to contain the spread and policies to address economic disruption are effective. We are preparing for opportunities emerging in credit and real assets, seeking to upgrade to managers that have been hard-closed and now have excess capacity and getting ready to invest.

This bear market has been more widespread, sudden, and severe. European markets, small caps, and value stocks have been particularly hard hit, especially Eurozone financials and energy stocks. Credit spreads have widened, the commercial paper market has been strained, and liquidity preferences are on display with major gaps between cash markets and more liquid futures, on-the-run and off-the-run US Treasuries and closed-end funds and ETFs relative to their underlying assets.

Following the Bear Market Playbook

Last fall, we published a five-part series entitled Managing Portfolios Through Equity Market Downturns. We emphasized that even as we did not see signs that a recession was probable near term, investors should prepare for the next downturn. We also discussed the importance of stress testing portfolios to evaluate if portfolio liquidity and other cash sources are adequate to support future spending needs and capital calls, of particular relevance today. Periods of stress force investors to think in terms of amounts, rather than percentages, as liabilities often have some fixed cost components. Further, in times of stress, the ability to generate liquidity can decrease as portfolio liquidity dries up and non-portfolio income sources may decline, while demand for spending and other cash needs may increase. Additionally, borrowers might violate debt covenants and credit ratings could deteriorate during major market declines.

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Is It Time to Rebalance?

Rebalancing portfolios is always difficult, especially during bear markets.

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