Developed Market Equities
In the first quarter of 2020, global stocks returned -21.37%, as proxied by the MSCI ACWI index.
The Japanese and U.S. equity markets held up better than other markets, recording returns of -16.79% and -19.77%, respectively. U.K. and Pacific ex Japan equities lagged the broader market, dropping -28.81% and -27.60%, respectively.
The global economy started to decelerate rapidly as countries implemented various degrees of social distancing to contain the spread of COVID-19. Market drawdowns approached -30% for many markets but bounced back slightly as global central banks began to implement fiscal and monetary stimulus.
Although the first quarter was characterized by heightened volatility and a steep drop in asset prices, value-oriented investors began to deploy cash and take advantage of buying opportunities.
Emerging Market Equities
Broader emerging markets posted a -24.22% return during the first quarter.
China and Korea outperformed, recording returns of -10.22% and -19.07%, respectively. Learning from prior pandemics, these countries took more stringent and effective containment measures. Their economies are slowly reaccelerating, and the degree of their recovery will be instructive for western countries on their path to normalization.
Investors looking to other emerging markets may face short-term headwinds from historically low oil prices and depreciating currencies, but emerging markets now trade at even more attractive valuations.
One of the problems faced by emerging markets since 2008 has been a recurring shortage of US dollars in times when the dollar is viewed as a safe haven.
The Federal Reserve has been aggressively setting up dollar swap facilities directly with some emerging market central banks to alleviate the short-term dollar squeeze.
Healthcare and information technology outperformed other sectors during the first quarter. They recorded returns of -11.39% and -13.05%, respectively.
Some firms, such as Amazon and Netflix, benefited from the coronavirus, as people, ordered to stay at home, relied on deliveries and internet-based services to meet their needs.
Energy and financials recorded losses of -44.56% and -31.05%, respectively. The energy sector was negatively impacted by the steep drop in demand caused by the coronavirus and the price war between Saudi Arabia and other countries. Saudi Arabia began to increase production and offered their oil at below market rates in the hopes of putting financial stress on other producers. However, Saudi Arabia and other oil producing countries later agreed to cut production by approximately ten million barrels per day.
Domestic Equity Factors
During the first quarter, value underperformed growth in the small-cap space and large-cap space. Momentum recorded a loss of -19.85% while the profitability index returned -17.26%.
Sectors characterized as value sectors, notably financials and energy, were hit especially hard.
Relative performance between value stocks and growth stocks are at historical highs as growth stocks held up better during the volatile quarter.
Momentum and large-cap growth strategies performed well during the past five and ten year periods.
Foreign Equity Factors
In the international developed markets, value underperformed growth in the large-cap and small-cap space.
Momentum recorded a loss of -15.44% while small-cap emerging market stocks posted a return of -31.15%.
Over the past ten years, the size premium has been negative in the broader emerging markets, but positive in the international developed markets.
Liquidity Providers & Disinflationary/Deflationary
During the first quarter, the three-month Treasury bill index returned 0.57%. With interest rates being cut even further to lessen the economic impact of the coronavirus, Treasury bill and money market fund yields are now close to 0%. Investors with more cash or Treasuries in their portfolios benefited from the high credit quality of the holdings.
Long-term government bonds and short-term government bonds returned 20.63% and 3.76%, respectively. As an added benefit, these investors now have the option to rebalance into other financial assets that were hit hard during the quarter.
The returns of lower credit quality disinflationary hedges were mostly negative for the month.
The Bloomberg Barclays U.S. Agg Bond Index returned -0.59%. Reaching for yield proved to be a risky strategy, with more aggressive forms of credit such as high-yield bonds, leveraged loans, and BDCs being hit especially hard.
Some mortgage REITs, which are levered income producing investments, faced intraday drops of more than 40%.
Looking forward, retirees and those approaching retirement face a difficult situation finding safe fixed income investments as the entire Treasury yield curve is now lower and flat.
Inflation-sensitive investment returns were mostly negative during the first quarter. WTI crude oil and the Alerian MLP recorded sizable losses of -66.53% and -57.19%, respectively.
Real estate, often sought by income-seeking investors, dropped almost 30% during the first three months of the year.
Traditional safe havens protected investors while equity markets tumbled.
Gold bullion is up 6.22% while the Swiss Franc and Japanese Yen appreciated against the U.S. dollar and most other major currencies.
Gold equities faced a similarly steep decline like the broader equity markets but have since rallied after the conclusion of the quarter. Gold investors now enter a favorable environment.
Monetary stimulus was overused during the past decade and further use will provide minimal benefits, especially in developed markets.
Developed market central bank rates are close to 0%. Emerging market central banks have further room to lower rates as their rates are higher and sit in the 4%-5% range.
Governments recently implemented historically high levels of fiscal stimulus, which will add to the ever increasing debt loads. If economic growth remains low, debt monetization may be the only way to address future government bills.
For your next Zoom happy hour, a surprising fact is the five year return for gold surpassed the five year return for the S&P 500!
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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