News & Insights
1. Global Macro: Before the Coronavirus event, the world growth was already slowing down, but remaining positive with the manufacturing sector bottoming out in recession in the main economic zones. The Coronavirus is worsening the global economic backdrop. China is taking effective measures to contain the virus at all levels: quarantine, travel moratorium, infrastructure and providing liquidity and stimulus to the financial system. These measures by themselves are creating an immediate economic shock in China. The goal of the Chinese authorities is to reduce as soon as possible the number of newly infected persons. In a modestly optimistic scenario where the Coronavirus is contained before the summer, the 2020 China GDP may be revised down 0.4% from 5.8% down to 5.4% with a 2% to 3% downward revision of corporate earnings across Asia. The economic regions the most dependent on global trade will suffer the most, specifically Asia and Europe, more than the US. The central banks in all blocs, including China, are monitoring the financing conditions in order to provide extra liquidity when needed according to their mandate.
2. Financial Markets: Equity: Year to date the Hang Seng sold off 6.7%, SP500 -0.2%, Eurostoxx -2.9%. Fixed Income: 10 year US yield decreased 0.40% to 1.52% (US treasury rally) pulling up the Emerging market government bonds in USD while EM local currencies sold off. Corporate bonds sold off modestly with High Yield spreads widening: US & Europe +0.30%. Currencies: USD rallied against most currencies except safe havens: EUR -1.1%, AUD -4.7%, RUB -6.7% and safe haven JPY +0.3%, CHF +0.7%, USDCNY is close to flat for the month. Commodities: Sell off across the board for industrial commodities and a rally of precious metals: Oil -15.6%, Gold +4.4%.
3. Risks: The Coronavirus is a new economic risk. Its amplitude and duration are unknown, although it is expected to be fading out by the summer. It adds to the risks that we inherited from 2019: US trade war with the other blocs, the Brexit process, middle-east unrest escalating (Iran, Syria, Libya, Lebanon), North-Korea restarting missile testing, a volatile US political environment (impeachment process, presidential election).
Risk Management: The SystematicEdge advanced risk perception indicators are rising. Consequently the Equity, Commodity and Currency downside are systematically minimized. The portfolio continuously accumulates income from quality bond allocation (average duration of 4.6 years) while upward exposure to safe havens such as US treasuries and Gold are increased with the goal of delivering double digit returns within our risk mandate.
4. Opportunities for 2020: Equity: The Coronavirus event is exacerbating the equity market divergence between the US where the SP500 is 10% above its high of 2018 and the Hang Seng that is 20% below its 2018 peak, regardless of fundamentals and valuation. This creates an unstable equilibrium where a correction of these excesses could take place in 2020. Fixed income: US treasuries are rallying in this context, generating robust total returns that may persist as any potential Fed rate change would be downward. Commodity: The Gold rally, was initially fueled by central banks’ purchasing (de-dollarization trend), low interest rates and capped USD by an increasing US dual deficit (budget and trade). The Coronavirus is an additional catalyst accelerating the gold rally.