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We have seen a notable risk-off market, with equity markets falling between 5-8% across the board, while bond prices rose with government bond yields falling. Ten-year U.S. Treasuries and 30-Year U.S. Treasuries now stand at all-time lows, with almost three rate cuts now priced into Fed Funds Rate futures for the next twelve months. Safe-haven assets like gold and the Japanese Yen have been notable outperformers, while crude oil has fallen by around 5% (Factset 26 February 2020).
What drove it?
Markets have become worried that the Coronavirus is having a ‘renaissance’ with reports over the weekend that the virus is spreading in Italy. In a matter of days Italy has become the third most hit country globally after China and Korea. The issue with Italy stems from authorities not knowing who was the first patient carrying the virus, which makes it more difficult to track infections. The risk is that too many cases develop from Italy, and not enough resources are in place to contact, isolate cases and contain the virus, leading to it becoming unmanageable. Hence, Italy rapidly decided to place towns and cities on lockdown.
It’s worth noting that the Coronavirus spreads faster than the normal flu and treatment or a vaccine have yet to be developed. It is difficult to pinpoint a mortality rate, as mild cases may not be reported. Investors are naturally worried about the potential negative impact of the Coronavirus on global growth, particularly if it continues to spread globally.
What is our view?
We think that volatility could prove temporary and caution against knee-jerk reactions at this point in time. On a positive note, we have received further confirmation that the epidemic is under control in China – with almost no new cases reported outside the Hubei province recently. Supply chains are being disrupted in sectors such as automobile and luxury goods but in most other industries inventories appear sufficient so far to cope with the ongoing disruption.
The exposure to riskier assets within our portfolios varies depending on the mandate agreed with each client. Our portfolios currently have an average level of equity exposure, reflecting our neutral to mildly positive view on equities. As communicated in our 2020 Counterpoint Outlook, equities should perform this year but the environment will likely be volatile. As such, we hold diversifiers such as physical gold and US Treasuries, which are serving our clients well in such volatile times. Within equities, we maintain our cautious stance on European equities. At a sector level, we continue to favour sectors such as technology and healthcare which should be more resilient in the current environment.
What are we watching?
On the virus itself, we continue to keep a close eye on the evolution of new cases on a daily basis across the globe.
On the policy side, we are watching actions from policy makers, be it on the monetary or fiscal side. For instance, Chinese authorities have recently loosened financial conditions by cutting interest rates and increasing lending facilities to help companies withstand the near-term uncertainty.
On the economic front, we will maintain a focus on economic data in important parts of the global supply chain in China, Europe and the U.S. Additionally, our equity research team is keeping a close eye on the developments reported by companies in terms of inventory, demand and supply chain management.
On the market front, we are watching asset prices closely as increased volatility could present an opportunity for long-term investors to seek exposure to attractive investments. We will update you as and when our viewpoint evolves.
Should you have any questions, please contact your usual Brown Shipley adviser.
The Investment Office
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