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Global Equities

Crisis Playbook—The Fear of Loss and Regret

David J. Eiswert, CFA, Portfolio Manager

Approaching the challenges and potential opportunities of market volatility.

Risk happens. Global equity markets entered 2020 in a state of Goldilocks—low interest rates and bottoming short‑cycle economic indicators. Markets were heavily focused on the Trump administration’s election “put” and China’s focus on economic stability heading into 2021. This benign environment drove markets and multiples higher.

Then the butterfly flapped its wings and we found ourselves with COVID‑19, the novel coronavirus.

COVID‑19 introduced a risk poorly handled by monetary policy, the world’s preferred tool for economic stability. A supply shock has spread outward from China along with the virus.

The virus appears to be very contagious but relatively mild compared with others, such as Ebola and MERS, but pandemic means suffering and death and must be urgently addressed. The immediate control of COVID‑19 is particularly complex in that many of its victims are either not sick or not so seriously sick that they can be identified and isolated quickly. A more virulent virus—one that made most people extremely sick (like Middle East Respiratory Syndrome (MERS) or even Severe Acute Respiratory Syndrome (SARS)—might be easier to control. Therefore, it seems logical that a virus with these characteristics could spread far and wide. At the same time, it seems that COVID‑19 is not a mortal threat to most people. Obviously, this is conjecture given I am no expert in virology or public health. So we are continuing to track the development of this crisis, learning and evolving our thinking as the situation unfolds.

Opening Quote Our first task is to act early. Closing Quote

Regardless, a virus that is novel and spreads far and wide means panic as well as volatility in asset prices as unexpected risks present themselves. We are tasked with managing a global equity portfolio given these circumstances, and in moments such as this, I am incredibly grateful for our global research resources. It is a luxury to have a network of industry experts around the world working with you.

Our first task is to act early. We moved to raise some cash from more risky parts of the portfolio as the virus began to leave China and present itself in Europe. This will allow us to redeploy into our best potential opportunities as they present themselves. We increased our exposure further to financial market exchanges and utilities exposure, which should be more robust amid rising volatility. We also reduced our stock‑level exposure to interest rate‑sensitive stocks.

While acting swiftly amid the panic is important, the window to panic itself is usually short‑lived before prices reflect the situation and head toward extremes. We are clearly closer to extremes now versus a month ago, to state the obvious.

Opening Quote We are looking to understand and evaluate the risk that the global reaction to the virus could cause a credit event. Closing Quote

We are looking to understand and evaluate the risk that the global reaction to the virus could cause a credit event. Collapsing oil prices and parked airplanes will have cash flow and balance sheet implications. Credit events are what cause real damage to equity investors over the medium term, and we are working with our equity and fixed income analysts and portfolio managers to assess and track these risks.

This is the time to use our imagination and think about what the world will look like in a year. Will we all be in quarantines, will air travel cease, and will we be undertaking all our meetings via videoconferencing? This is an extreme and unlikely possibility. In short, we do not think that the world has entered a new paradigm where we do not travel and meet others, although the market has the ability to price in this fear. Travel and meetings will be significantly down over the next six or so months, as will economic activity.

We are spending our time identifying opportunities in high‑quality, value‑creating stocks via our research platform. We have asked all our analysts to focus on those two to three ideas that they think will create the most economic value midterm and long term for our clients. Providing the best vehicle for our clients to turn a crisis into potentially strong returns requires a balancing act of risk and return as well as the patience to time our decisions.

Opening Quote ...the right thing to do is to invest in our best ideas, embracing the reality that this requires difficult choices. Closing Quote

Regardless of today’s uncertain environment, we believe that the right thing to do is to invest in our best ideas, embracing the reality that this requires difficult choices. The fear of loss is great and can lead to bad decisions. The fear of future regret is something that is harder for people to master. What will you regret in the future? This is true in life and in investing. What I have experienced over the long term is that investors regret not buying great assets in times of crisis. In the short term, anything can happen, but history tells us that in the long term, if we focus on great assets on the right side of change, we should be able to serve our clients well.

The virus has disrupted the likelihood of modest economic acceleration in the first half of 2020 that we had expected. However, we also believe that given the level of global liquidity and likely policy response, there is a good chance that economic acceleration is only delayed rather than canceled. On the other side of the virus outbreak could be a significant rebound in activity. We want to be cautiously optimistic about this scenario. We are using our resources and our investment framework to do our best to make good decisions for our clients, balancing risk and return, and the fear of loss versus regret.

Key Risks—The following risks are materially relevant to the strategy highlighted in this material: Transactions in securities of foreign currencies may be subject to fluctuations of exchange rates which may affect the value of an investment. The portfolio is subject to the volatility inherent in equity investing, and its value may fluctuate more than a fund investing in income-oriented securities. The portfolio may include investments in the securities of companies listed on the stock exchanges of developing countries.

Important Information

This material is being furnished for general informational and/or marketing purposes only. The material does not constitute or undertake to give advice of any nature, including fiduciary investment advice, nor is it intended to serve as the primary basis for an investment decision. Prospective investors are recommended to seek independent legal, financial and tax advice before making any investment decision. T. Rowe Price group of companies including T. Rowe Price Associates, Inc. and/or its affiliates receive revenue from T. Rowe Price investment products and services. Past performance is not a reliable indicator of future performance. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested.

The material does not constitute a distribution, an offer, an invitation, a personal or general recommendation or solicitation to sell or buy any securities in any jurisdiction or to conduct any particular investment activity. The material has not been reviewed by any regulatory authority in any jurisdiction.

Information and opinions presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources’ accuracy or completeness. There is no guarantee that any forecasts made will come to pass. The views contained herein are as of the date written and are subject to change without notice; these views may differ from those of other T. Rowe Price group companies and/or associates. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price.

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