Published: March 2, 2020

Relevant Strategies

• Moderate
• Balanced (and International Balanced)
• Growth
• Aggressive Growth (and International Growth)
• Gold & Precious Metals
• Natural Resources
• Peter Schiff

Our Commentary

Markets have taken a sharp turn downwards in recent weeks on concerns that the Coronavirus, or Covid-19 as it is now known, will slow economic growth and reduce corporate profits.

Initially, its impact on markets largely depended on their proximity and economic exposure to China, with investors working on the basis that it would progress in a similar way to the 2003 outbreak of SARS, eventually petering out with limited impact on the global economy.

However, its recent appearance in Italy and other countries has sparked wider recognition that the virus has spread and led to investors adopting a ‘Risk off’ stance.

A ‘Risk off’ stance is where more cautious investors reduce their exposure to equity markets and potential buyers step back on the expectation of lower prices.

While the human impact of the virus itself is of great concern, the key focus for investors has been the ‘lockdown’ response of governments. The immediate effect of this policy is not only to reduce economic activity in the areas affected, but to slow or stop the distribution of components needed in processes elsewhere in the world and to reduce tourism and travel related activity, reducing activity globally.

While the eventual impact of both Covid-19 and the lockdown policy is unknown, what is clear is that corporate profits in the first half of the year and possibly beyond will be lower than previously expected, justifying a correction in equity markets that were only recently hitting new highs. In other words, the recent correction is the ‘pricing in’ of upcoming drops corporate profits.

Should the virus continue to spread, the effectiveness of and need for the lockdown policy will increasingly come under scrutiny.

On any suspicion of positive change in the lockdown policy, investors will rapidly shift to a ‘Risk on’ stance, with potentially significant gains in those parts of the market most hit by the policy.

In other words, whilst the authorities are focused on reducing the spread of the disease there could be a significant economic impact. If there comes a point where specific containment measures are seen to have achieved as much as they can and governments effectively start sending people back to work, there may well be an overall positive impact as the brakes are released.

Portfolio Actions

Having added exposure to emerging markets on valuation grounds, our portfolios underperformed when the virus first surfaced in January due to the exposure to China.

Since then, with the spread of the virus slowing in China and the rush to invest into biotech, medical services, pharmaceutical and educational stocks in China, indices there have held up relatively well.

Most analysts still feel it is too early to assume a long term economic impact and that globally the downturn in earnings and economic activity will be short-lived with potentially a partial catch up in H2.

With major equity markets around 15% off the peak, we are not advocating widespread selling at this stage and would be cautiously seeking to purchase where reduction in asset value appears unjustified.

Today, we are closing our exposure to CSOP SOURCE FTSE CHINA A50 (CHNP, IE00BGSHB123). Although it is our core exposure to China, during February and the Coronavirus outbreak the holding has held up well and outperformed the MSCI World by approximately 15%.

In addition, we are closely monitoring the markets and intend to re-balance the portfolios with some of these actions this month:

Potential Reductions

• Vanguard S&P 500 UCITS ETF
• Vanguard FTSE Developed Europe UCITS ETF
• iShares MSCI Japan Index Fund
• iShares FTSE EPRA/NAREIT US Property Yield Fund
• L&G Gold Mining UCITS ETF

Potential Closures

• Xtrackers FTSE China 50 UCITS ETF
• iShares S&P Em. Markets Infrastructure
• iShares MSCI India ETF
• iShares Edge MSCI World Value Fact UCITS
• iShares MSCI World ETF

Potential Additions

• UBS MSCI World SRI
• UBS MSCI Emerging Markets SRI
• iShares MSCI EM ESG Enhanced
• L&G Gold Mining

We will provide you more commentary from our fund managers as we receive them.

Regards,

Euro Pacific Advisors Management Team