The recent slide in global equity markets, initially centered around China’s slowing growth and policy, has heightened concerns about another financial crisis, especially with 2008 and 2011 still fresh in our minds. We’d like to take this opportunity to let you know how we have been positioning United Church Funds’ portfolios, and highlight our thinking.
In recent commentaries we have said, “As the second half of 2015 unfolds, we would expect that while issues in Greece will be addressed, China may continue to be a source of anxiety for global markets. Accommodative monetary policy around the globe continues to support markets, but investors should expect somewhat higher volatility than we have seen over the past few years.” Part of our reasoning: equity markets, especially in the US, have been far less volatile than normal the past few years. The last 10% market correction occurred over 900 days ago, which compares to the more usual one per 357 days. The recent low volatility has been supported by easy monetary policy by the Federal Reserve since 2009. As that support is gradually withdrawn, there is some concern that the economy and markets won’t be able to stand on their own.
The US economy is very unlikely to enter a recession with housing and job improvement so healthy.
The question: now that many markets have had a 10% move downward from all-time highs, is this a correction or harbinger of more carnage to come? Things look scary right now, especially if you’re paying attention to the general market perceptions or feel compelled to tune in to CNBC’s special report on “Markets in Turmoil”.
Bottom line: we don’t believe that domestic economic data indicates impending doom for the US, and figures and sentiment seem to indicate that it’s less likely that stocks are in for a more significant retrenchment, as of now. A few specifics: the US economy is very unlikely to enter a recession with housing and job improvement so healthy. Interest rates are low, lower inflation benefits the consumer, and lower commodity prices can benefit the broader economy. Globally, leading indicators of growth in Europe and Japan are also positive, despite a weaker emerging world, and China.
What have we been doing?
First, in the Total Equity Fund, we have been maintaining diversification away from US equities, based on valuation and high, but potentially falling profit margins. Instead, we have held exposure to European and Japanese equities with more potential. Admittedly, emerging markets have been more difficult but are extremely cheap. Second, we have maintained a focus on hedged strategies in the Alternatives Balanced Fund, which are intended to dampen volatility and protect principal in declining markets. This strategy was not in place in 2011. Third, we have incorporated the new Beyond Fossil Fuels strategy into portfolios, where selected, which has outperformed the US market during the recent period of slowing global growth and commodity price weakness. Fourth, in portfolios where appropriate, we have maintained an allocation to fixed income, some cash and other diversifying assets in all balanced funds.
Another important note about our approach
Our mission is to invest for your longer-term benefit, and not for the next month. When prices are volatile in the short run, caused by short-term investors and participants, we should keep calm, carry on, and add value for you. Our partner managers must be nimble enough to pick up bargains to benefit your performance versus the market — that’s why we engage them on your behalf. Most importantly, they should help us take the longer view when markets become too focused on the short-term noise, or fear.
Finally, and for your interest, we have included a chart of 5% monthly corrections since 1980, and chronicle the subsequent performance. As you can see, it is clearly mixed, and does not necessarily presage further downside.
We are certainly aware of the risks, but we take very seriously our role as one charged to help mitigate those risks. We will continue to keep you updated as conditions warrant.