Navigating A Stock Market Crisis

Over the past two decades, global stock markets have endured crisis after crisis. These have been spurred by problems with Asian and Russian debt in the late 1990s, the tech implosion, the Global Financial Crisis and Sars. Despite all of these, equity values have risen over that period.

According to Scott Nisbet, one of the partners tasked with leading Baillie Gifford’s response to the Covid-19 crisis, the firm has performed well relative to markets in times of uncertainty, with its ownership structure playing a big part in achieving that outcome.

“We remain an unlimited liability partnership, so we’re very aligned with our clients’ interests. We try to take a long-term view” Nisbet says. As he explains it, the absence of pressure to deliver quarter-to-quarter results allows Baillie Gifford’s investment teams to focus on identifying winners that will succeed over extended periods, including bouts of market weakness.

But when markets are troubled, priorities must change: “Usually, we’re spending a lot of time saying, ‘Look how much this company could grow over the next 10 years, it’s going to be worth five or 10 times the amount it is today,’ which is great. But it has to be around in the first place in order to grow. And therefore, right now, our analysts are looking at the balance sheets of the companies, to say, ‘right, let’s just check that this is going to survive’”.

That said, longer-term growth prospects remain the key to investment decision making, as Nisbet points out. “In our stock discussions, I think one thing that separates us from many managers is that we spend most of the time looking at the upside. How well could this company do? We do need to check it’s going to survive first, but, then, how well could it do and how undervalued is it? Most people’s tendency is to spend most of the time knocking the case down, saying ‘what about this or what about that?’

“We have a rule in the team I work in that, for the first 20 minutes we discuss a stock, if you’re going to speak, you have to say something that contributes to the bull case. If you say, ‘but what about?’ you get kicked out of the room.

“Even after having this protocol for many years, you’d be surprised how often people still get kicked out of the room, because it’s our natural tendency to be negative. So, I think you need to put conscious, almost formal, things in place to combat that instinct, which is compounded, for sure, at the moment.”

Nisbet also underlines the need to switch off from the stress that comes with extreme market movements. To him, it’s about how individuals spend their time away from work, be it sport, music or reading: anything that requires an alternative focus.

Albert Camus. © ...

“When there’s a bit of a crisis, I always think about the great novel or the wonderful book that I’ve read that is most akin to what we’re living through and ask what I can take from it. For this crisis right now, there’s a really obvious one that I’ve just put on my bedside table again,” he adds. “It’s The Plague by Albert Camus. It’s the story of the bubonic plague terrorising this small town in Algeria. The story is about the heroics that you see in human nature, and also some of the bad side: the cowardliness, the selfishness.

“What Camus concludes at the end of The Plague is that the crisis showed that there was more to admire in human beings than there was to despise.”

Back in the world of work, Nisbet acknowledges that any crisis will prompt diverse questions, and the current situation is no exception. Clients need to know that an investment manager is still able to do the job of managing money and to be reassured about prospects for the portfolio.

“Obviously, we usually avoid talking about very small periods of time. You can’t really take any meaning from them. But because recent events have been so spectacular, clients are keen to derive some kind of conclusion about how Baillie Gifford is doing. And even in very short periods, when the market’s been going down quite steeply, our kind of companies are holding up pretty well.

“They’re going down in value on a short-term basis, but not relative to the market. And most of them have very strong balance sheets, so most of them are going to survive”. From the Great Depression, to two world wars, and numerous subsequent stock market slumps: a century and more of crashes and recoveries have taught Baillie Gifford that the great entrepreneurial firms with the best ideas continue to pass the test and find a way to thrive.

You can listen to our podcast here. Words by Colin Renton