What is happening?
Investors have again become more pessimistic, and global equities have sold off over worries about the continued spread of the SARS-Co V-2 (Wuhan Coronavirus) beyond its epicenter in the central province of Hubei. Infections have now been reported in 28 countries, and news from Iran and Italy provoked fear about what could happen in the U.S. The Center for Disease Control (CDC) today warned about potential “disruption to everyday life”.
Although the market reaction was originally focused on commodities, oil markets, and those industries especially impacted by the virus (airlines, etc.), the U.S. equity market has begun to react, with a 1000 point down day for the DJIA on Monday, February 24th and further declines today. The clear implication is that global growth will come down, especially in the near term, and especially in China and neighbors.
The silver lining, if any, is that bond investors have been very positively rewarded during this time period, benefitting from central bank policies to lower interest rates around the world. We have seen many countries (Brazil and Indonesia the latest example) lower interest rates over the past six months, and increasingly investors are wagering that the US Federal Reserve (Fed) will be forced to once again lower rates after doing so three times in 2019, especially if the coronavirus slows growth here.
How are the funds positioned?
The Fixed Income Fund, balanced funds including the Moderate, Conservative, and Beyond Fossil Fuels Balanced Fund own ample bonds (fixed income) securities to benefit from lower interest rates and price appreciation in those markets. The core fixed income team managing the bulk of fixed income assets has increased its interest rate sensitivity recently again, which will benefit performance also. In January, we reduced equity weightings in these balanced funds after significant market appreciation in 2019.
What are we doing?
Judging from past precedents, U.S. treasury securities and other safe-haven assets could continue their rally for the near term. These fears may keep the upper hand for risk assets such as equities until there’s a signal from the Fed and/or we get better news on the virus. If there is a greater selloff than we now anticipate, we would not hesitate to add to equities, especially in balanced funds, for your long-term benefit. We also expect that our active equity managers will use price dislocations to act in the best long-term interests of investors.