Published: March 2, 2020

Relevant Strategies

• Moderate
• Balanced (and International Balanced)
• Growth
• Aggressive Growth (and International Growth)
• Gold & Precious Metals
• Natural Resources
• Peter Schiff

Our Commentary

Markets have taken a sharp turn downwards in recent weeks on concerns that the Coronavirus, or Covid-19 as it is now known, will slow economic growth and reduce corporate profits.

Initially, its impact on markets largely depended on their proximity and economic exposure to China, with investors working on the basis that it would progress in a similar way to the 2003 outbreak of SARS, eventually petering out with limited impact on the global economy.

However, its recent appearance in Italy and other countries has sparked wider recognition that the virus has spread and led to investors adopting a ‘Risk off’ stance.

A ‘Risk off’ stance is where more cautious investors reduce their exposure to equity markets and potential buyers step back on the expectation of lower prices.

While the human impact of the virus itself is of great concern, the key focus for investors has been the ‘lockdown’ response of governments. The immediate effect of this policy is not only to reduce economic activity in the areas affected, but to slow or stop the distribution of components needed in processes elsewhere in the world and to reduce tourism and travel related activity, reducing activity globally.

While the eventual impact of both Covid-19 and the lockdown policy is unknown, what is clear is that corporate profits in the first half of the year and possibly beyond will be lower than previously expected, justifying a correction in equity markets that were only recently hitting new highs. In other words, the recent correction is the ‘pricing in’ of upcoming drops corporate profits.

Should the virus continue to spread, the effectiveness of and need for the lockdown policy will increasingly come under scrutiny.

On any suspicion of positive change in the lockdown policy, investors will rapidly shift to a ‘Risk on’ stance, with potentially significant gains in those parts of the market most hit by the policy.

In other words, whilst the authorities are focused on reducing the spread of the disease there could be a significant economic impact. If there comes a point where specific containment measures are seen to have achieved as much as they can and governments effectively start sending people back to work, there may well be an overall positive impact as the brakes are released.

Portfolio Actions

Having added exposure to emerging markets on valuation grounds, our portfolios underperformed when the virus first surfaced in January due to the exposure to China.

Since then, with the spread of the virus slowing in China and the rush to invest into biotech, medical services, pharmaceutical and educational stocks in China, indices there have held up relatively well.

Most analysts still feel it is too early to assume a long term economic impact and that globally the downturn in earnings and economic activity will be short-lived with potentially a partial catch up in H2.

With major equity markets around 15% off the peak, we are not advocating widespread selling at this stage and would be cautiously seeking to purchase where reduction in asset value appears unjustified.

Today, we are closing our exposure to CSOP SOURCE FTSE CHINA A50 (CHNP, IE00BGSHB123). Although it is our core exposure to China, during February and the Coronavirus outbreak the holding has held up well and outperformed the MSCI World by approximately 15%.

In addition, we are closely monitoring the markets and intend to re-balance the portfolios with some of these actions this month:

Potential Reductions

• Vanguard S&P 500 UCITS ETF
• Vanguard FTSE Developed Europe UCITS ETF
• iShares MSCI Japan Index Fund
• iShares FTSE EPRA/NAREIT US Property Yield Fund
• L&G Gold Mining UCITS ETF

Potential Closures

• Xtrackers FTSE China 50 UCITS ETF
• iShares S&P Em. Markets Infrastructure
• iShares MSCI India ETF
• iShares Edge MSCI World Value Fact UCITS
• iShares MSCI World ETF

Potential Additions

• UBS MSCI World SRI
• UBS MSCI Emerging Markets SRI
• iShares MSCI EM ESG Enhanced
• L&G Gold Mining

We will provide you more commentary from our fund managers as we receive them.

Regards,

Euro Pacific Advisors Management Team

Published: January 10, 2020

Relevant Strategies

• Moderate
• Balanced (and International Balanced)
• Growth
• Aggressive Growth (and International Growth)
• Gold & Precious Metals
• Natural Resources

Our Commentary

Equities

Economies and stock markets most exposed to manufacturing fared best, with China, Asia and Emerging Markets all gaining ground.

Global equities closed the year at new highs on news that the US and China had agreed terms for a partial settlement of their long-running trade dispute.

Although the wide-ranging dispute is far from over and could potentially rumble on for years, stock markets rallied at the prospect of stronger global economic growth and a rise in corporate profits.

Fixed Income

Inevitably, not all assets provided such positive returns.

Fixed interest stocks continued their steady retreat from their summer highs as the prospect of recession diminished and investors sought better value in other assets, primarily equities. Other defensive assets remained out of favour.

Our 2020 Outlook

Building on an upbeat 2019-year end

Financial markets enter 2020 propelled by generally positive expectations for the year ahead and with central banks remaining accommodative.

However, it is not likely to be smooth sailing for investors, given several potentially market-moving events scheduled for this year.

Coming up are the likelihood of the UK’s exit from the European Union at the end of January, US elections in November, and the ongoing US-China trade negotiations. Geopolitical risks also remain heightened in the Middle East, with rumblings in North Korea and Iran under scrutiny.

Global growth underpinned by 2019 central banks

Underpinning financial market fortunes, however, are expectations that growth will be propped up by the comprehensive monetary policy easing that took place across developed and emerging markets last year.

Ongoing mini-quantitative easing operations conducted by the European Central Bank and the US Federal Reserve will continue to add liquidity to the economy.

Most major investment banks are predicting global growth to recover to above-trend levels in 2020 after slowing in the final months of 2019. JP Morgan Research estimates global growth to come in at 2.5%, US growth at 1.7% and emerging market growth at 4.2%. Goldman Sachs is more circumspect but still expects moderately better economic growth. Morgan Stanley expects consumption improvements to propel a mini-recovery with global growth averaging 3.2% in 2020, coming predominantly from emerging markets and, to a lesser degree, an improving outlook in Europe.

US-China trade will remain under the spotlight

The trajectory of the US-China trade negotiations will continue to have a material impact on financial market fortunes. Business sentiment, which was dented by the uncertainty around trade negotiations, should firm as the US and China Phase 1 trade deal is scheduled to be signed in January.

A relatively upbeat outlook for equities

Against this broadly encouraging macro-economic backdrop, the outlook for global equities is relatively upbeat, notwithstanding the significant advances achieved by the asset class during 2019. Gains are, however, not expected to be as substantial as last year.

In the US there is the continuing risk posed by the trade war, and the possibility of the next Congress reversing the 2017 US corporate tax cut. Goldman Sachs forecasts that such a move could see S&P 500 earnings growth in 2021 contract by 7% rather than grow by 5%.

There will be many forces at play during 2020, many of which could well be positive. However, a cautious and considered approach is advisable in navigating the risks and potential challenges that lie ahead.

Portfolio Actions

Although there has been a steady flow of bids for UK businesses and assets by international companies over the past three years, this quarter saw the return of mainstream portfolio investors attracted by low valuation.

This inflow, together with relief over the election outcome saw sterling rise, reducing the translated returns of international assets for sterling-denominated investments.

We continue to look to capitalise on extended short-term relative weakness of defensive sectors and the year ended strongly for our exposure to the utilities sector and to stocks such as Smith & Nephew and Mowi ASA.

We expect emerging markets to be prime beneficiaries of an uptick in global manufacturing, the phase one trade deal and better economic news out of China. With ethical considerations an increasing focus for investors, we are looking to add further exposure to emerging markets, focusing on companies with a socially responsible bias.

Regards,

Euro Pacific Advisors Management Team