Developed Markets Tumble
In the month of March, international developed stock markets recorded a return of -14.12%. The Japanese and U.S. equity markets held up better than other markets, recording returns of -7.15% and -12.73%, respectively. Canadian and Pacific ex-Japan equities lagged the broader market. At the low point for the month, drawdowns reached -30% for most markets but partially recovered towards the end of the month. While economic growth came to a halt due to the global impact of the coronavirus and financial markets fell dramatically, value investors began to deploy cash and take advantage of low prices.
Chinese Equity Market Holding Up
Broader emerging markets posted a -16.39% return for the month. China and Korea recorded returns of -6.59% and -10.22%, respectively. Brazil and Mexico lagged other markets in March. The Chinese equity market outperformed in March and YTD as they took exceptional measures to slow the spread of the virus. Their economy is beginning to accelerate. Other emerging markets have been hit hard due to the fall of oil prices or the depreciation of their currency. Emerging markets now trade at even more attractive valuations.
Energy Sector has Tough Start to 2020
Energy and infrastructure recorded losses of -29.18% and -22.96%, respectively, in March. Healthcare and consumer staples outpaced other sectors. The energy sector was negatively impacted by the steep fall in oil prices caused by the coronavirus and the price war between Saudi Arabia and other countries. Defensive sectors held up far better than the more cyclical sectors.
Small-Cap Stocks Underperforming
In March, value underperformed growth in the small-cap space and large-cap space. Momentum recorded a loss of -13.93%. Relative valuations between value stocks and growth stocks are at historical highs as growth stocks held up better during the volatile month. 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 loss of -9.56% while small-cap emerging market stocks posted a return of -22.08%. Over the past ten years, the size premium has been negative in the broader emerging markets, but positive in the international developed markets.
Declining Rates Continue to Affect Savers
In March, the three-month Treasury bill index returned 0.29% for the month. With interest rates being cut even further, pushing Treasury bill and money market fund yields close to 0%, savers must choose between investing in riskier assets or face a drop in purchasing power. The CPI increased by 2.32% year over year through February.
Treasuries Protect Portfolios during Downturn
The returns of deflationary hedges were mostly negative for the month, with only Treasuries providing material protection to portfolios. Long-term government bonds and short-term government bonds returned 5.93% and 1.62%, respectively. The Bloomberg Barclays U.S. Agg Bond Index returned -0.59%. Riskier forms of credit such as high-yield bonds, leveraged loans, and BDCs were hit especially hard.
Gold Bullion Shines
Inflation-sensitive investment returns were mostly negative for the month. Crude oil and the Alerian MLP recorded sizable losses of -54.40% and -47.23%, respectively. Gold bullion is up 6.22% YTD as investors sought safe havens. With monetary stimulus being overused during the past decade and further use providing minimal benefits, governments are resorting to unprecedented levels of fiscal stimulus to weather the storm. As government debt loads rise and yields are being artificially compressed, gold and gold miners may find their way into more investors’ portfolios.
Swiss Franc and Japanese Yen Remain Strong
Over the past three months, the U.S. dollar appreciated against most other major currencies except the Swiss Franc and Japanese Yen. These other two currencies tend to hold up well during periods of economic stress.
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.
Disclosure: Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Versant Capital Management, Inc.), or any non-investment related content, made reference to directly or indirectly in this article will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this article serves as the receipt of, or as a substitute for, personalized investment advice from Versant Capital Management, Inc. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Versant Capital Management, Inc. is neither a law firm nor a certified public accounting firm and no portion of the article content should be construed as legal or accounting advice. If you are a Versant Capital Management, Inc. client, please remember to contact Versant Capital Management, Inc., in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. A copy of the Versant Capital Management, Inc.’s current written disclosure statement discussing our advisory services and fees is available upon request.