Market Volatility
The Night Watch sheds daylight on market disruptions
Julian Abdey
Equity Portfolio Manager
Jared Franz
Anne-Marie Peterson
Equity Portfolio Manager

On the surface, it seems unlikely that a 17th century Dutch painting would have much relevance in today’s volatile investment environment. But if you take a moment to look at Rembrandt’s masterpiece, “The Night Watch,” you may notice that every person depicted in the painting is looking in a different direction, each bringing a unique view to the gathering.

Flash-forward nearly 400 years and “The Night Watch” is the inspiration for a multidisciplinary research team at Capital Group that seeks to gain a deeper understanding of market disruptions, assessing the risks and evaluating the opportunities that arise during times of extreme crisis. Not surprisingly, the group’s current focus is COVID-19.

“The goal of the Night Watch is to look at highly uncertain events, where the outcome is essentially unknowable, and study them from all angles,” explains Capital Group economist Jared Franz, who covers the U.S. and Latin America. “Like the individuals in the painting, we are looking out in all directions, evaluating possible scenarios and considering potential outcomes.”

Image shows “The Night Watch” painting, completed by Rembrandt Harmenszoon van Rijn in 1642, on display at The Rijksmuseum in Amsterdam.

Scenario planning, not predictions

"The No. 1 rule of the Night Watch is: Leave your preconceived notions at the door. Don’t start with what you think will happen, look at what could happen,” adds Julian Abdey, an equity portfolio manager and active participant in the group. "This is about evaluating the possible scenarios — from very negative to very positive — and understanding what each would mean for a variety of asset prices. At the end, it is up to the different investment units and individual portfolio managers and analysts to determine how probable each one is."

This concept goes to the heart of The Capital System℠, which relies on the multiple and diverse perspectives of Capital Group’s investment professionals, combined with independent, high-conviction decision-making. The Night Watch doesn’t make investment decisions on its own, but it helps inform the larger organization.

The idea for Capital's Night Watch approach was formed in the aftermath of the 2008–09 global financial crisis to engage in scenario planning around severe downside events. In more recent years, the team explored the risk of rising corporate debt levels. This year, the group took on perhaps its most daunting crisis: the coronavirus outbreak and resulting government lockdowns that have triggered the worst economic downturn since the Great Depression.

Corporate debt dilemma

In the corporate debt analysis, the Night Watch team raised an early alarm about rising debt levels and deteriorating credit conditions in the U.S. corporate bond market.

Following the financial crisis, ultra-low interest rates and central bank bond-buying activities created an environment where many companies could borrow vast sums of money at historically low financing costs. The “hunt for yield” by some investors accelerated the process, encouraging companies to continue the borrowing binge despite a late-cycle economic environment. Even more worrisome: Companies with relatively low credit ratings accounted for more than 50% of the market last year.

Chart headline reads: U.S. corporate debt continues to rise. Image shows U.S. corporate debt as a percent of U.S. gross domestic product rising steadily from 1951, when it was under 25%, to March 31, 2020, when it was above 45%. Sources: Capital Group, Bureau of Labor Statistics, Refinitiv Datastream. As of March 31, 2020. Includes all non-financial corporate debt and loans. Shaded bars represent U.S. recessions as defined by the National Bureau of Economic Research.

“We could see that soaring levels of corporate debt were producing an imbalance in the economy,” says Franz — whose formula for anticipating a recession is equal parts late-cycle economy, rising imbalances and some catalyst to set it all off. “We worked closely with our fixed income team to quantify the downside risk in specific corporate bonds so they could make those investment decisions on a security-by-security basis.”

This approach to bond investing is an important part of maintaining a balanced and actively managed portfolio, explains fixed income portfolio manager John Queen.

“One of the real strengths of the Night Watch and other multidisciplinary research groups is the fact that we have multiple views — or multiple eyes, so to speak — on each problem,” Queen says. “We also have analysts who are investors, so when a crisis comes along, we already know the industries and the companies well, and we can act quickly if needed to address the unfolding events.”

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Confronting the virus

In its ongoing coronavirus analysis, the Night Watch group has, again, studied the crisis from all angles, including the economic, market and health implications. The team has looked closely at many recession and recovery scenarios: V-shaped, U-shaped, W-shaped, L-shaped and even a Nike-style swoosh. In doing so, they’ve put together a weekly dashboard to help track in real-time which scenarios are more likely.

In terms of the U.S. economy, evidence is mounting for a U-shaped recovery, Franz says. Massive government stimulus measures are helping to soften the economic impact, but rising infection rates in many U.S. states are complicating the recovery effort.

“There’s still a lot we don’t know about the virus, and I think the next few months are going to be tough,” Franz says. “But longer term, a year or so down the road, I think the chances of developing a vaccine are good, and that bodes well for a stronger recovery in late 2021 or early 2022.”

Indeed, global equity markets are telegraphing such a recovery, given the extraordinary rally since late March. From a historical perspective, that pattern has played out many times before as markets powered through previous outbreaks, including Swine flu, MERS, Ebola and the Zika virus.

The chart headline reads: “Global equity markets have powered through past viral outbreaks.” The image shows previous outbreaks from 2001 to 2019, including SARS, Avian flu, Swine flu, MERS, Ebola, Zika and COVID-19, along with an overlay of global equity market performance as represented by the MSCI All Country World Index. Sources: Centers for Disease Control and Prevention, MSCI, RIMES. As of June 30, 2020. Total return index levels are expressed in U.S.-dollar terms and indexed to 100 on December 31, 2000. Disease labels are estimates of when the outbreak was first reported.

Investment implications

Investing during the COVID-19 outbreak has, in some ways, accelerated trends that were already in place prior to the pandemic, such as the growth of e-commerce and cloud computing. The virus has hastened the decline of some companies, such as traditional retailers, that were already struggling to survive. But it has also devastated some industries that were previously doing well, particularly travel and tourism — meaning the outlook is very much sector-by-sector and company-by-company.

Companies such as Amazon, Netflix and Shopify have benefited greatly from the “stay at home” era, while companies such as Airbus, Boeing and Royal Caribbean have suffered. However, both scenarios may present compelling investment opportunities, notes equity portfolio manager Anne-Marie Peterson.

“My approach is more micro than macro, but there’s no question that the macro environment right now is creating a period of extraordinary change,” Peterson says. “Some companies are getting stronger, some are getting weaker and some are going away. I think what the Night Watch team highlights is that we have an incredible group of researchers that evaluates these macro events on a very deep level, helping us to understand the risks and ultimately to act on the long-term investment opportunities that often emerge during times of crisis.”

Julian Abdey is an equity portfolio manager with 28years of investment industry experience (as of 12/31/2023). He holds an MBA from Stanford and an  an undergraduate degree in economics from Cambridge University.

Jared Franz is an economist with 18 years of industry experience (as of 12/31/2023). He holds a PhD in economics from the University of Illinois at Chicago and a bachelor’s degree in mathematics from Northwestern University.

Anne-Marie Peterson is an equity portfolio manager with 29 years of investment experience (as of 12/31/2023). She holds a bachelor’s degree in economics from the University of California, Irvine. She is also a CFA® charterholder.

The Capital Group companies manage equity assets through three investment groups. These groups make investment and proxy voting decisions independently. Fixed income investment professionals provide fixed income research and investment management across the Capital organization; however, for securities with equity characteristics, they act solely on behalf of one of the three equity investment groups.


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MSCI ACWI is a free float-adjusted market capitalization-weighted index that is designed to measure equity market results in the global developed and emerging markets, consisting of more than 40 developed and emerging market country indexes. The index is unmanaged and, therefore, has no expenses. Investors cannot invest directly in an index.


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