Market Update – March 10, 2020
Considering the significant market volatility resulting from the COVID-19 outbreak, as well as the plunge in oil prices reflecting Saudi Arabia’s decision to accelerate output, we wanted to provide you with an update on Mawer’s strategy in this challenging environment.
Recently, two events exacerbated global demand and supply problems. From a demand perspective, Italy announced that it would quarantine the entire country, some 60 million people, foreshadowing a potential widespread reduction in economic demand as countries look to cancel travel and events, and restrict social activities. On the supply side, Saudi Arabia cut its official selling price of crude, sparking a steep decline in oil prices and increasing supply at a time when demand is already constrained due to COVID-19 containment efforts. The resulting market volatility was significant and could continue for the foreseeable future.
While such volatility is understandably unsettling, our portfolios remain diversified and built to be resilient across several economic scenarios. Our most effective way to manage risk is via careful security selection. We’re pleased to see all Mawer’s equity funds outperforming their benchmarks thus far in 2020. While we are still experiencing losses, they are not to the same extent as what you may be seeing in the headlines. We also have several companies on our inventory list and, should attractive opportunities present themselves, we are ready to act.
From an asset mix perspective, despite many years of equities outperforming cash and bonds, we have been vigilant in trimming equity to prevent the weight from drifting too far from neutral. This required numerous equity trims as markets climbed, including as recently as mid-January 2020. Bonds have behaved exactly as we expected in this type of scenario and strong gains in Canadian and global bonds have partially offset the equity losses. We’re also overweight cash in client portfolios, which has added to overall portfolio stability.
Currencies are also behaving in this situation as we would expect. Safe havens like the U.S. dollar and Japanese yen are strengthening, while the Canadian dollar has shed value thus far in 2020. Our positioning of being overweight U.S. equity and underweight Canadian equity has also helped insulate our portfolios from greater downside. This desire for greater U.S. dollar exposure has been prevalent for quite some time as we have believed that in a global economic slowdown it would provide greater resiliency.
While we continue to invest for the long-term, our teams have made a few adjustments to improve resiliency since the beginning of the year:
- Equity portfolios have below average energy exposure due to the nature of our investment philosophy. In some portfolios, we reduced our energy exposure further prior to the Saudi decision in order to improve economic resilience.
- Companies with internet-based businesses have been emphasized should human behaviour change for an extended period of time. For example, we have increased our weight in Amazon in our U.S. equity and Global equity strategies and NetEase (an online gaming company in China) in our International equity and Emerging Markets equity strategies.
- Bank positions in portfolios have been trimmed to reflect the prospect of lower interest rates for longer and greater credit risk, e.g., State Street, JP Morgan and DBS.
- In balanced and fixed income portfolios, we have reduced credit exposure, while retaining positions in high quality issuers. This has the effect of improving the liquidity of the portfolio.
While we don’t know how this situation will play out over future weeks and months, we expect volatility to remain elevated and are prepared for a wide range of scenarios. Rather than trying to predict short-term outcomes and make tactical changes, our approach remains focused on investing in strong, well-run businesses and on ensuring portfolios are well-diversified and resilient. As we have stated in the past, for long-term investors, the middle of a storm is not the time to fix your ship.
—Mawer Global Research