News & Views

Coronavirus Outbreak24 February 2020

At the start of the year when the Investment team were putting forward their views on the global economy for 2020, we were aware that a ‘black swan’ event could occur. At the time we were unsure what type of event could occur and how it would impact markets. The Coronavirus outbreak in Wuhan, China is one such event. It has dominated news headlines over the past few weeks and currently has no distinct end point.

The situation is on-going, meaning that making any dramatic changes to our investment views would not be the right thing to do at this point. What is known is that China is a major part of the global economy. With the infection rate also now spreading globally, it is not just China that is in the spotlight. Having the isolation and containment policies in place does mean that in the short-term, global growth will be affected. There will also be a temporary impact to supply chains as businesses continue to be shut, consumers spend less and goods movement stalls. In the short term, this is negative for global economies. However, we believe that in the medium and long-term economies and global data should not be impacted too much on current guidelines. The effects should be transitionary in nature. This means that the next quarters data will be hit but moving into the second half of the year it should improve.

Now, the investment team at MAIA understand that with such an outbreak, the backdrop can change very quickly. Therefore, we continue to run diversified portfolios that invest in a wide range of different assets that work well in differing market conditions. For the longer term, we still believe that equities provide the best opportunity for positive returns. Within this though, we are focusing more on the UK and US with less focus on Emerging Markets and Asia. This has benefitted us, as both Emerging Markets and Asia have been hit hardest since the outbreak was confirmed. Europe has now been brought into the crossfire which is another area which we have been slightly underweight across our portfolios.

Running alongside our equity exposure, which can be more volatile, we utilise fixed income and alternatives which provide diversification and a natural hedge to volatility when it arises. In the most recent selloffs, our fixed income content performed well as investors globally moved towards fixed income to provide less volatility and increase defensive attributes.

We also continue to hold an overweight position in our alternative holdings. These include Infrastructure, Defined Returns and Gold. All three have defensive attributes which work very well in times of equity volatility. This was the case in the middle of January and the latest falls. Over the past few days the Gold price has risen to its highest amount since 2016 providing growth against equities, which have become more volatile. All our alternative assets have and will continue to provide some defensive hedges compared to the equites held.

The Coronavirus is a terrible outbreak which will have short term impacts on data, but as stated above, these black swan events are impossible to predict. This means pricing from markets occurs quickly and will develop as the news develops. We do not want to time events like this as we could get it horribly wrong. Instead, we focus on the data and look for where we can add performance and return in the longer term, while providing defensive attributes from other asset classes. It is something we have and will continue to do regarding our investment portfolios.

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