Market Commentary: Impact of the Coronavirus on Markets and Portfolios

February 28, 2020 |
3 minute read
|

After a strong calendar year 2019, the S&P 500 reached its most recent all-time high on February 19, up nearly 5 percent since the year began. Now, a week later, the global equity markets have fallen nearly 14 percent and yields on 10-year Treasuries are below 1.17 percent due to the growing and unpredictable threat of the Coronavirus (COVID-19). Although the market moves of the past week have put investors on edge, it is important to remember that corrections are a fundamental part of market cycles.

Indeed, periods of sudden and sharp volatility are not uncommon. Events such as the U.S. debt downgrade in 2011, the Eurozone sovereign debt crisis in 2010-12, China's sharp slowdown in 2015-16 and more recently, global trade wars in 2018 all caused investors to sell risk assets. Ultimately, however, these events did not end the longest equity bull market in history. And in each case, the most prudent response by investors was adherence to strategic policy. Today is somewhat unique, however, in that COVID-19 is a global challenge that is unfolding for reasons independent from financial markets and economics, making it more difficult to predict and to price. Nevertheless, given what we know right now, we see no reason to take drastic action. Rather, we believe staying disciplined with regard to investment policy and strategic asset allocation targets is the best course of action here, too.

As investors, we remain focused on what impact COVID-19 may have on the global economy over the short and the longer term, and how this could influence investment returns. Specifically, we are watching the following:

  • global growth;
  • central bank policy
  • valuations.

We already know that the spread of COVID-19 will result in a reduction in global growth expectations in the near term. One of the data points we follow within our macro dashboard, the OECD Total Leading Indicator index, showed that growth had already begun to slow below long-term trend over the past year. If the virus continues to expand globally, we see slowing growth moving to flat to slightly negative growth in the U.S. vs. 0.8 percent growth globally.

Monetary policy could become more accommodative as the U.S. Federal Reserve and other global central banks are expected to cut interest rates to support economic growth. The market is now pricing one rate cut from the March Fed meeting, two cuts by June, and three cuts by the end of 2020. Whether stimulative monetary policy will be successful remains to be seen, however, as policy rates are already at very low levels across the developed world. In addition, lower interest rates are unlikely to spur economic activity if people are unable to report to work or are avoiding public places such as shopping centers. We believe accommodative monetary policy would be most effective once there are clear signs of virus containment and a return to normal daily routines.

Although the outlook for corporate earnings is more uncertain, fundamentals remain largely intact, particularly in the U.S., and we do not believe reducing equity allocations is warranted at this time. Currently, we remain benchmark neutral in our regional equity exposure. We recognize that non-U.S. equity valuations are much cheaper relative to the U.S., but we would first look to see a recovery in fundamentals and earnings growth internationally before contemplating a change to geographic weightings.

Turning to our private investments in China, we are happy to report that our Beijing staff remains healthy and unaffected as do the staff at the managers we invest with. As expected, the investment pace has slowed given travel and other restrictions. We are actively communicating with managers currently and will be closely monitoring the 4Q2019 and 1Q2020 financials for any sign of material impact to our private capital funds. Currently, our managers are focused on supporting their portfolio companies, while exploring new opportunities arising from the outbreak, such as online education, online medical counseling and healthcare services. Not surprisingly, the healthcare sector in venture capital has experienced a short-term boost and could benefit in the medium and longer term, particularly pharmaceutical companies and online diagnosis platforms.

We expect volatility to remain pronounced in the coming days and weeks as the market digests news flow on the virus and the global economy. It is too early to determine whether this will be a short-term market event or a longer-term global economic disruption. At the end of 2019, we made the decision to reduce a modest overweight position in hedge funds in order to increase optionality in advisory client portfolios and increase liquidity. Our intention at the time was to redeploy that capital opportunistically. We will continue to watch the economic data releases to better understand the depth and breadth of the impact the virus is having on global markets. Notwithstanding a new development that could impact the structure of the global economy for an extended period, our response is likely to be one of staying the course. Nonprofit investors with perpetual pools of capital should be able to weather challenging market events and their impact on returns over the short-to-intermediate term. We believe the focus should be on maintaining the flexibility to adjust portfolio positioning in response to new developments.

 
Mark J.P. Anson

Author

Mark J.P. Anson

Chief Executive Officer and Chief Investment Officer, Commonfund

Disclaimer

Certain information contained herein has been obtained from or is based on third-party sources and, although believed to be reliable, has not been independently verified. Such information is as of the date indicated, if indicated, may not be complete, is subject to change and has not necessarily been updated. No representation or warranty, express or implied, is or will be given by The Common Fund for Nonprofit Organizations, any of its affiliates or any of its or their affiliates, trustees, directors, officers, employees or advisers (collectively referred to herein as “Commonfund”) or any other person as to the accuracy or completeness of the information in any third-party materials. Accordingly, Commonfund shall not be liable for any direct, indirect or consequential loss or damage suffered by any person as a result of relying on any statement in, or omission from, such third-party materials, and any such liability is expressly disclaimed.

All rights to the trademarks, copyrights, logos and other intellectual property listed herein belong to their respective owners and the use of such logos hereof does not imply an affiliation with, or endorsement by, the owners of such trademarks, copyrights, logos and other intellectual property.

To the extent views presented forecast market activity, they may be based on many factors in addition to those explicitly stated herein. Forecasts of experts inevitably differ. Views attributed to third-parties are presented to demonstrate the existence of points of view, not as a basis for recommendations or as investment advice. Market and investment views of third-parties presented herein do not necessarily reflect the views of Commonfund, any manager retained by Commonfund to manage any investments for Commonfund (each, a “Manager”) or any fund managed by any Commonfund entity (each, a “Fund”). Accordingly, the views presented herein may not be relied upon as an indication of trading intent on behalf of Commonfund, any Manager or any Fund.

Statements concerning Commonfund’s views of possible future outcomes in any investment asset class or market, or of possible future economic developments, are not intended, and should not be construed, as forecasts or predictions of the future investment performance of any Fund. Such statements are also not intended as recommendations by any Commonfund entity or any Commonfund employee to the recipient of the presentation. It is Commonfund’s policy that investment recommendations to its clients must be based on the investment objectives and risk tolerances of each individual client. All market outlook and similar statements are based upon information reasonably available as of the date of this presentation (unless an earlier date is stated with regard to particular information), and reasonably believed to be accurate by Commonfund. Commonfund disclaims any responsibility to provide the recipient of this presentation with updated or corrected information or statements. Past performance is not indicative of future results. For more information please refer to Important Disclosures.

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Disclaimer

Certain information contained herein has been obtained from or is based on third-party sources and, although believed to be reliable, has not been independently verified. Such information is as of the date indicated, if indicated, may not be complete, is subject to change and has not necessarily been updated. No representation or warranty, express or implied, is or will be given by The Common Fund for Nonprofit Organizations, any of its affiliates or any of its or their affiliates, trustees, directors, officers, employees or advisers (collectively referred to herein as “Commonfund”) or any other person as to the accuracy or completeness of the information in any third-party materials. Accordingly, Commonfund shall not be liable for any direct, indirect or consequential loss or damage suffered by any person as a result of relying on any statement in, or omission from, such third-party materials, and any such liability is expressly disclaimed.

All rights to the trademarks, copyrights, logos and other intellectual property listed herein belong to their respective owners and the use of such logos hereof does not imply an affiliation with, or endorsement by, the owners of such trademarks, copyrights, logos and other intellectual property.

To the extent views presented forecast market activity, they may be based on many factors in addition to those explicitly stated herein. Forecasts of experts inevitably differ. Views attributed to third-parties are presented to demonstrate the existence of points of view, not as a basis for recommendations or as investment advice. Market and investment views of third-parties presented herein do not necessarily reflect the views of Commonfund, any manager retained by Commonfund to manage any investments for Commonfund (each, a “Manager”) or any fund managed by any Commonfund entity (each, a “Fund”). Accordingly, the views presented herein may not be relied upon as an indication of trading intent on behalf of Commonfund, any Manager or any Fund.

Statements concerning Commonfund’s views of possible future outcomes in any investment asset class or market, or of possible future economic developments, are not intended, and should not be construed, as forecasts or predictions of the future investment performance of any Fund. Such statements are also not intended as recommendations by any Commonfund entity or any Commonfund employee to the recipient of the presentation. It is Commonfund’s policy that investment recommendations to its clients must be based on the investment objectives and risk tolerances of each individual client. All market outlook and similar statements are based upon information reasonably available as of the date of this presentation (unless an earlier date is stated with regard to particular information), and reasonably believed to be accurate by Commonfund. Commonfund disclaims any responsibility to provide the recipient of this presentation with updated or corrected information or statements. Past performance is not indicative of future results. For more information please refer to Important Disclosures.