Springing into 2020
Catching a spring cold, the markets cough
Coronavirus anxiety has swept the world as markets weigh the impact CoViD-19 may have on the global economy. One of the biggest battles being waged is that of information as reliable news is being drowned out by speculation and hysteria. This version of coronavirus is a more severe version of the common cold, and will be limited to cold-like symptoms in many of those who get infected. Elderly and people with pre-existing health conditions are at heightened risk of complications, but the gross majority of cases are recovering, usually at home. A few reputable places to find out more information are:
- World Health Organization's (WHO) Frequently Asked Questions on CoViD-19
- Health Canada's CoViD-19 Summary & Update Page
- US Center for Disease Control Coronavirus Dashboard
We note that the case count in China is showing signs of stabilization and scientists are working overtime to develop better tests and a vaccine. Companies have started to advise that their first quarter earnings may be softer than projected to prepare the markets for that news down the road. Governments and their central banks around the world have started to take action with stimulus packages being announced across Asia and we anticipate these financial injections will continue around the world. It is widely anticipated that interest rates will be cut in many countries as our institutions look to heal the economic weakness brought on by the virus.
Disruptions have been felt in industries from manufacturing to tourism; air transportation and cruise lines were the first to succumb. This past week showed a marked increase in stock market volatility as the year-to-date gains were returned. Investors have been looking for a reason to sell given the outsized gains of the past year and this spring's cold has become that reason. A reminder for reading headlines: when it comes to market moves it is better to think in terms of percentages rather than points. In percentage terms, the recent volatility is notable but not at all extraordinary. Most recently we can think back to last summer or the previous winter we see similar behavior of 2-3% per day market moves. For now, volatility has returned.Below we will discuss what this means for portfolios.
What are we doing and where do we go from here?
For the past five months, we've been gradually de-risking our portfolio of investments and increasing the diversification into alternative investments. Performance was strong into the end of 2019 and as the January headlines started to break regarding a new illness in China, we reduced our stock market exposure in our managed accounts. Fundamentals remained strong through the recent batch of corporate earnings but we anticipated that future economic growth may be slowed by the de-globalization that tends to follow pandemics.
In the short term, the impact of CoViD-19 will be on supply chain and business disruption as factories temporarily close and vacations get rescheduled. Conferences and business trips are being cancelled or delayed as companies look to mitigate the risks for employees and customers. Japan announced a month long spring break for their schools as a precaution. We anticipate that global growth will likely take a similar vacation and we have muted expectations for the economy for the start of 2020. As we've seen with past pandemics, this delay in spending usually releases itself quickly once the situation stabilizes and we would expect the same in this case. If you need a new car, you may not buy it this week but even a month from now you will still need a new car; the demand has not gone away but is simply delayed. We remain invested based on this analysis as our portfolios have been structured to weather the storm.
Long term, we see this as a wake up call for companies to analyze their supply chain and distribution models for geographical risks (such as a factory closure in China). This may lead to increased investment in diversified manufacturing, an uptick in online sales and delivery, investment in technology for allowing workers to log in from home and many other peripheral benefits that our portfolios are positioned to participate in. We see this as a reinforcement for our thesis that automation, accessibility and technology will be leading the growth story of the next decade.
Our investment process
Instead of a particular investment feature, we wanted to take the time this month to look at our process for investing holistically. We pride ourselves on a disciplined approach and it is in times like these that that discipline is the most important. Below is an outline of process for our managed accounts, if you have any questions please do not hesitate to ask.
- Strategic Asset Allocation - Our portfolios start at a high level with a diversification between various asset classes (cash, equities, fixed-income and alternatives). This asset mix improves the risk-adjusted returns of the portfolio as safer investments dampen the impact of more volatile assets.
- Tactical Asset Allocation - Within the context of our mutually agreed upon investment parameters, we will adjust investments intermittently to take into account economic, market and geo-political factors.
- Portfolio Construction - We choose our investments based on their effectiveness in reaching their targeted opportunity and look to diversify across countries, sectors and industries to manage concentration risk.
- Security Selection - We utilize a multi-step process that reviews fundamentals, long-term business prospects, future catalysts and positioning relative to peers. We layer on a deep investigation of their financials to check for potential balance sheet risks. We then look at technical performance to help enhance entry points. Where we do not have a specialized expertise, we use external managers and alternative investments to access unique strategies that add diversification benefits to our portfolios.
- Ongoing Monitoring - We monitor broad strategic positioning, portfolio structure, and individual securities relative to market changes to ensure the fundamental rationale behind our decision making remains favourable. If changes are needed, we will make adjustments to keep you on track towards your goals.
Tax slips & information
As tax slips start to trickle into mailboxes we've seen an increase in requests for information. March is usually the best time to start consolidating your information as the tax revisions from investment funds are adjusted and finalized. You can expect to have the last of your investment slips confirmed by the end of March. Please let us know if you have questions.
A great feature of our online portal my.RichardsonGMP.com is the account access that can be granted to your accountant to view your documents and tax slips. If you would like to know how to enable this access you can give us a call.
Chernick & Associates Wealth Management Group
Richardson GMP Limited
1055 West Hastings Street, Suite 2200
Vancouver, BC V6E 2E9
Toll Free: 1.866.640.0400