The Multi-Asset Process

February 2020 Market Review

The last week of February has overshadowed not just the month but the whole of 2020 so far, with the increasing spread of Coronavirus across the world. This led to markets tumbling and giving up all the gains of the first eight weeks of the year as investors come to terms with the considerable human cost of the virus and the economic disruption of locking down whole cities.

This made the last few days of February the worst week since the 2008 crisis. As would be expected, we saw the usual accompanying surge in gold as a safe haven, rising around 10% so far this year.

In the first few weeks following the outbreak of Coronavirus in China, the expectation was that the virus would follow a similar path to SARS. We now know this was wrong but there is currently little knowledge of the new virus and no certainty about how long or extensive the outbreak will be. This makes it impossible to know what the economic consequences will be, although the majority view is that there is likely to be a V shaped recovery once the virus is under control.

Clarity around the situation is not helped when we live in the age of social media and scare stories spread so quickly: historically, the economic cost of a virus has been more from the associated fear than the disease itself and the language across much of the press of ‘sweeping pandemics’ can only fuel that.

As long-term investors, it is vital we do not react with panic or greed. We must assess whether any event is relevant or not, creates investable opportunities or the need to sell, and whether we are too early or too late to invest.

Given the clear impact the situation is having – from deserted airports to production lines grinding to a halt – we cannot dismiss this as market noise but, as ever, warn against extrapolating short-term market moves into decisions that affect long-term asset allocation decisions.

Like the rest of the market, we maintain a watching brief and can act if necessary, either to protect or capture opportunities. At present, however, we see no reason to make changes to either our tactical asset allocation or holdings across our portfolios.

Context is everything in this case: China is home to 1.3 billion, or a fifth of the world’s population, and something like nine million of these people die every year. As for the flu, annual epidemics are estimated to result in three to five million cases of severe illness worldwide and as many as 500,000 deaths.

China obviously remains hardest hit as the epicentre of the outbreak and we saw the country’s president
Xi Jinping warn the virus would have a “relatively big impact on the economy and society”. He added it would be short-term and controllable, however, and the government would step up efforts to cushion the blow.

Early estimates suggest the outbreak will reduce Chinese growth by 2% in Q1 but only about 0.2% for the full year as catch-up activity occurs and offsetting economic stimulus is implemented – but obviously the longer the situation continues, the greater any impact could eventually prove to be.

Elsewhere, tech companies, whose supply chains have been disrupted, took the brunt of the market drop and this wiped out all the Dow´s and S&P 500´s gains for the year – and we have seen a number of companies reporting lower than expected numbers as either manufacture or demand has suffered.

Having tied himself to stock market success so tightly, President Trump was quick to reassure investors that the US economy remains in good shape and the market was looking attractive. To be fair, we have also seen a number of economists support that view over the month, albeit primarily in an attempt to warn against any short-term overreaction.

As ever, finding an economic consensus is hard but while there are obviously outliers at both extremes, many suggest uncertainty
generated by Coronavirus should not distract from the underlying trends in place at the turn of the year, primarily reflation, manufacturing revival, diminishing trade war uncertainty, and tailwinds from fiscal and monetary policies worldwide. If anything, policy support is likely to increase to counter short-term uncertainty, leading to a sharper bounceback later in the year against a backdrop of depressed expectations. 

Others have highlighted the disparity between ‘Wall Street and Main Street’ – or the market and the consumer for us non-Americans, with data on areas such as consumer spending and housing growing increasingly positive over the last year.

Looking ahead to the US election with his trademark prescience, Trump said the market would jump ‘thousands of thousands of points’ if he wins a second term later this year and a crash ‘like you never have seen before’ in the event of a Democrat victory. Despite the recent drop-off, the market has surged since Trump’s shock win back in 2016 and he is clearly playing up to nervousness on Wall Street about Elizabeth Warren or Bernie Sanders clamping down on the financial sector.

Coronavirus kept Brexit and trade out of the news for much of February but both continue to bubble along in the background, with chlorinated chicken more of a focal point than most people would wish. Both the UK and Europe have signed off their negotiating mandates ahead of initial trade discussions to begin in March, with the EU urging Boris Johnson to keep his promises. It also confirmed warnings from chief negotiator Michel Barnier that Britain must sign up to a level playing field in any free trade agreement and early faultlines are emerging in areas including fishing.

The Government is hoping to achieve the broad outline of an agreement by June with a goal of
finalising a deal by September. But if there has been insufficient progress by June, they would “need to decide whether the UK’s attention should move away from negotiations and focus solely on continuing domestic preparations to exit the transition period in an orderly fashion” – once again, we face a ticking Brexit clock.

Johnson is also facing the first signs of pressure from the geographically broad mandate he won in December, with a report highlighting a lost decade in the UK in which life expectancy has stalled for the first time in a century and actually fallen in some of the country’s poorest corners. As we wrote when the Tories unexpectedly won many supposedly left-wing seats in December, these voters will quickly join the ranks of those expecting Johnson to keep his promises.

On the trade war front, the Phase One deal came into force over the month and we reiterate previous comments: it is enough to reduce short-term uncertainties (although, of course, that has been replaced by Coronavirus concerns) but fails to address more contentious topics.

Until the two countries deal with these fundamental issues, they will remain mired in the Thucydides Trap – a conflict between an existing power challenged by a potential usurper. Trade is a symptom of that deeper conflict, which extends to differences over technology, capital flows, and geopolitics. Despite promises from the US, Phase Two discussions look unlikely to make much progress this year due to American elections and diverted focus of the Chinese authorities towards containing Covid-19.

To finish on Coronavirus, few investors are held in as high esteem as Warren Buffett and
he has added to the debate to say current fears should not affect stocks over the longer term. His quote that "You can't predict the market by reading the daily newspaper" is one we should all keep in mind over the coming months, with markets likely to remain volatile in line with headlines and February’s oscillations setting the pattern.

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Key Risks & Disclaimer

Please remember that past performance is not a guide to future performance and the value of an investment and any income generated from them can fall as well as rise and is not guaranteed, therefore you may not get back the amount originally invested and potentially risk total loss of capital.

This content should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy.  It contains information and analysis that is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content of this document, no representation or warranty, express or implied, is made by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. It should not be copied, faxed, reproduced, divulged or distributed, in whole or in part, without the express written consent of Liontrust.

Tuesday, March 3, 2020, 2:20 PM