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Market Commentary: Impact of the Coronavirus on Markets and Portfolios

February 28, 2020  | by Mark J.P. Anson

COVID-19 | Market Commentary

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:

1

global growth;

2

central bank policy;

3

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.

IMPORTANT NOTES

ANY OPINIONS, ASSUMPTIONS, ASSESSMENTS, STATEMENTS OR THE LIKE (COLLECTIVELY, “STATEMENTS”) REGARDING FUTURE EVENTS OR WHICH ARE FORWARD-LOOKING, INCLUDING REGARDING PORTFOLIO CHARACTERISTICS AND LIMITS, CONSTITUTE ONLY SUBJECTIVE VIEWS, BELIEFS, OUTLOOKS, ESTIMATIONS OR INTENTIONS OF AN INVESTMENT MANAGER, SHOULD NOT BE RELIED ON, ARE SUBJECT TO CHANGE DUE TO A VARIETY OF FACTORS, INCLUDING FLUCTUATING MARKET CONDITIONS AND ECONOMIC FACTORS, AND INVOLVE INHERENT RISKS AND UNCERTAINTIES, BOTH GENERAL AND SPECIFIC, MANY OF WHICH CANNOT BE PREDICTED OR QUANTIFIED AND ARE BEYOND AN INVESTMENT MANAGER'S OR AN INVESTMENT PRODUCT'S CONTROL. FUTURE EVIDENCE AND ACTUAL RESULTS (INCLUDING ACTUAL COMPOSITION AND INVESTMENT CHARACTERISTICS OF AN INVESTMENT PRODUCT'S PORTFOLIO) COULD DIFFER MATERIALLY FROM THOSE SET FORTH IN, CONTEMPLATED BY, OR UNDERLYING THESE STATEMENTS, WHICH ARE SUBJECT TO CHANGE WITHOUT NOTICE. THERE CAN BE NO ASSURANCE AND NO REPRESENTATION IS GIVEN THAT THESE STATEMENTS ARE NOW, OR WILL PROVE TO BE ACCURATE, OR COMPLETE IN ANY WAY. THE INVESTMENT MANAGER UNDERTAKES NO RESPONSIBILITY OR OBLIGATION TO REVISE OR UPDATE SUCH STATEMENTS. STATEMENTS EXPRESSED HEREIN MAY NOT BE SHARED BY ALL PERSONNEL OF COMMONFUND.

Authors

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Mark Anson is the Chief Executive Officer and Chief Investment Officer of the Commonfund and Chairman of the Board of Commonfund Capital Inc. and Commonfund Asset Management Company. Previously, he was the President and Chief Investment Officer for the Bass Family Office of Ft. Worth, Texas which was recognized as Family Office of the Year for 2014 & 2015. He was the President & CEO of Nuveen Investments, and Nuveen Alternative Investments, a full service asset management company with over $250 billion in assets under management. Prior to Nuveen, Mark served as the Chief Executive Officer and Chief Investment Officer for the British Telecom Pension Scheme (BTPS), the largest institutional investor in the UK with assets of £65 billion. In addition, Mark was the CEO of Hermes Pensions Management in London, a £55 billion asset management company that is wholly owned by the BTPS. Prior to joining BTPS, he served as the Chief Investment Officer of the California Public Employees' Retirement System, the largest institutional investor in the United States with over $300 billion in assets. Mark is currently a Trustee for the $65 billion UAW Medical Benefits Trust. He also serves on the Law Board of the Northwestern University School of Law, the Board of the Toigo Foundation, and the Board of Panagora Asset Management. He is the only person to have served on the Board of Governors for both the CFA Institute and the CAIA Association. Mark has published over 100 investment articles in professional journals and has won three Best Paper Awards. He is also the author of five financial textbooks including the Handbook of Alternative Assets, which is the primary textbook used for the Chartered Alternative Investment Analyst program. Mark earned a B.A. in Economics and Chemistry from St. Olaf College, a Ph.D. and Masters in Finance from Columbia University Graduate School of Business, and a J.D. from Northwestern University School of Law, all with honors. He has also received several industry awards in recognition of his leadership in asset management. Last, Mark has earned the Chartered Financial Analyst, Chartered Alternative Investment Analyst, Certified Public Accountant, and Chartered Global Management Accountant professional degrees, and he is a Member of the Law Bar of New York and Illinois.
Mark Anson, PhD, CFA, CAIA
Chief Executive Officer and Chief Investment Officer
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Information, opinions, or commentary concerning the financial markets, economic conditions, or other topical subject matter are prepared, written, or created prior to printing and do not reflect current, up-to-date, market or economic conditions. Commonfund disclaims any responsibility to update such information, opinions, or commentary. To the extent views presented forecast market activity, they may be based on many factors in addition to those explicitly stated in this material. 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. Managers who may or may not subscribe to the views expressed in this material make investment decisions for funds maintained by Commonfund or its affiliates. The views presented in this material may not be relied upon as an indication of trading intent on behalf of any Commonfund fund, or of any Commonfund manager. Market and investment views of third parties presented in this material do not necessarily reflect the views of Commonfund and Commonfund disclaims any responsibility to present its views on the subjects covered in statements by third parties. 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 Commonfund fund. Such statements are also not intended as recommendations by any Commonfund entity or 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. Past performance is not indicative of future results. For more information please refer to Important Disclosures.

Disclaimer

Information, opinions, or commentary concerning the financial markets, economic conditions, or other topical subject matter are prepared, written, or created prior to printing and do not reflect current, up-to-date, market or economic conditions. Commonfund disclaims any responsibility to update such information, opinions, or commentary. To the extent views presented forecast market activity, they may be based on many factors in addition to those explicitly stated in this material. 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. Managers who may or may not subscribe to the views expressed in this material make investment decisions for funds maintained by Commonfund or its affiliates. The views presented in this material may not be relied upon as an indication of trading intent on behalf of any Commonfund fund, or of any Commonfund manager. Market and investment views of third parties presented in this material do not necessarily reflect the views of Commonfund and Commonfund disclaims any responsibility to present its views on the subjects covered in statements by third parties. 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 Commonfund fund. Such statements are also not intended as recommendations by any Commonfund entity or 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. Past performance is not indicative of future results. For more information please refer to Important Disclosures.