Developed Markets Take a Step Back
In the month of January, international developed stock markets recorded a return of -1.94%. The U.S. and Canadian equity markets held up well, recording returns of 0.16% and -0.42%, respectively. European equities lagged the broader market. Economic growth is slowing in both the U.S. and international developed markets. However, the U.S. equity market may be more susceptible to a drop given its current high valuation.
Coronavirus Introduces Volatility into Markets
Broader emerging markets posted a -4.56% return for the month. Mexico and India recorded returns of 1.37% and -0.79%, respectively. Brazil and Korea lagged other markets in January. The Chinese equity market faces some uncertainty as the long-term economic effects of the coronavirus is unknown. If the spread of this virus is controlled, the long-term economic effects may be minimal.
Energy has Tough Start to 2020
Energy and materials recorded losses of -9.14% and -5.52%, respectively, in January. Utilities and information technology outpaced other sectors. The energy sector faces lower demand due to coronavirus fears and slowing short-term growth. Information technology continues to power market returns. Extrapolating this outperformance may cause investors to take on unwarranted amounts of risk.
Momentum has Strong Month
In January, value underperformed growth in the small-cap space and large-cap space. Momentum recorded a gain of 2.33%. Relative valuations between value stocks and growth stocks are at historical highs as growth stocks continue their upward climb. Momentum and large-cap growth strategies performed well during the past one- and five-year periods
Value Underperforms in International Markets
In the international developed markets, value underperformed growth in the large-cap and small-cap space. Momentum recorded a modest gain of 1.11% while small-cap emerging market stocks posted a return of -4.01%. The divergence of performance between growth stocks and value stocks has been more muted in the international markets relative to the U.S. market.
Savers Being Pushed Out on the Risk Curve
In January, the three-month Treasury bill index returned 0.13% for the month. The returns of Treasury Bills have kept pace with inflation. Today’s low rates are forcing savers to invest in riskier assets just to maintain purchasing power. The CPI increased by 2.29% year over year through December.
Interest Rate Risk and Credit Risk Paid Off in January
The returns of deflationary hedges were mostly positive for the month. Long-term government bonds and high-yield municipal bonds returned 6.78% and 2.46%%, respectively. The Bloomberg Barclays U.S. Agg Bond Index returned 2.44%. Emerging market bonds continued their strong performance, returning 1.74% in January. While spreads have tightened due to strong performance, the emerging market debt asset class still yields approximately 4%-5%.
Gold Bullion Shines
Inflation-sensitive investment returns were mixed for the month. Crude oil and natural gas recorded sizable losses of -15.04% and -14.58%, respectively. Gold bullion returned 4.58% as investors were concerned about the potential economic impact of the coronavirus. In recent years, Interest in gold has increased as recessionary concerns linger. Central banks, especially in emerging markets, continue to increase their gold holdings, reaching a twenty-year peak. Late cycle risks, low and negative real interest rates, and geopolitical risks are some of the reasons gold is attracting the marginal investor.
U.S. Dollar Mixed Versus Other Currencies
Over the past three months, the U.S. dollar appreciated against the Australian dollar and Indian rupee but depreciated against most other major currencies. For international equity investors, a weakening U.S. dollar will provide a tailwind to returns.
Brandon Yee, CFA, CAIA – Research Analyst
Brandon conducts investment due diligence for Versant Capital Management, and designs and implements tools and processes to support the firm’s research. His background in biology and finance help him to look at challenges from multiple angles, resulting in unique and well-rounded approaches and solutions.
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