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Crisis Playbook (Part II)—The Power of ''Stop Getting Worse''

Looking beyond to find the best outcomes for clients

David J. Eiswert, Portfolio Manager
T. Rowe Price,  March 2020

We believed the coronavirus would spread, so we acted early. We moved to reduce risks in the portfolio that weren’t conducive to the deteriorating backdrop, and we neutralized balance sheet issues as much as possible. We leveraged our global research platform to focus on the stocks we want to own as this crisis deepens, but also for when we come out on the other side.

If you are going to de‑risk, you need to do it early. Why? Because as any crisis unfolds, the longer‑term opportunities become potentially compelling. This crisis is no different.

We believe the Global Focused Growth Equity Strategy is a tool that offers exposure to compelling investment ideas, always balancing conviction at the stock level with risk mitigation individually and collectively. We have made changes to the strategy in the past few weeks and, importantly, feel good about how it is positioned today for the medium to long term.

Short‑Term Pain

We believe the world will enter a recession in the next one to two quarters. The freezing of economic activity is too powerful for the global economy to withstand without a significant impact. But I believe it will be a different kind of recession. It will involve a fundamental disconnect between longer‑term economic value (the present value of free cash flow) and the acute impact of short‑term financial obligations (rent, interest and principal payments, payrolls, etc.). This is not a debt crisis, or in any way a normal economic cycle, because of the root cause.

Stocks typically bottom when the economic environment “stops getting worse,” not when economic or earnings data are trending better. Given this, we need to focus on signs that indicate when it will “stop getting worse” as opposed to focusing on the elimination of all risk until things get better.

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