Since the beginning of January, we have been monitoring both the Covid-19 coronavirus and the widening impact this has had on the markets. Given the early incidence of the trajectory of the number of new cases and the increased transmission of the virus, it became clear that unusual measures would be needed to identify and stop the spread of the virus. Social distancing seems to be effective and more extreme lockdowns appear to halt the transmission almost completely. China has greatly reduced the number of new cases throughout the country after having acted in a way that seemed ‘draconian’ at the time. For this quarter, this has hurt the Chinese economy, its expected growth rate, and its supply chains. But, they are now starting to get back to work. An issue that China could have is decreased demand from other markets as the virus spreads throughout the world.
In the early stages of the European spread of the virus, on Feb 26th we held an emergency committee meeting to greatly reduce our asset allocation to the Pacific and Japan with a less extreme reduction to our allocation for the FTSE All Share, emerging markets, FTSE 250 and Europe. These reductions were based on trend-following indicators which are shorter than ones which we had previously selected. This seemed prudent at the time due to the increase in volatility in the markets and in the spread of the coronavirus cases. At that time there was almost no indication through even the shortest of trend-following indicators, that there would be any impact on international or American funds.
At our normal investment committee meeting on the 2nd of March, the drop in values for the American and international funds began to show up on some of our shorter trend-following signals. Under normal market conditions, our research has found that trading once a month is sufficient. But, given the unusual circumstances we decided that it would again be prudent to reduce our allocation for both the US and international funds. The trades were completed on the 2nd but took a few days to filter through the different platforms. In some cases, this delay helped our sale prices with the sale occurring on the height of the bounce on the 4th.
This Monday, 9th of March, we again held another emergency meeting following the continued spread of the corona-virus and the drastic fall in market values. At this time, we decided to sell out of all equities and move completely into our basket of alternative assets. Although this was a dramatic move, it was based on the large increase in trend-following indicators recommending to be out. It was also apparent that the spread of the virus had not yet been halted as there has been limited and inconsistent government action.
The US government, whose actions impact markets throughout the world, did not appear yet to realise the full extent of the virus’ reach or the impact it could have on life. There are not enough tests. Those showing symptoms are not being tested even when recommended by doctors. Without a national health system, the costs of testing and care are borne by both the patient and the insurer. This alone will reduce the numbers being tested. For those who are part of the gig economy with mild symptoms may not want to be tested or choose to self-isolate.
As markets opened on the 9th, trading on the New York stock exchange was halted after a dramatic plunge triggered the 7% “circuit-breaker”. This has occurred again today after President Trump acknowledged for the first time the severity of the virus and a travel ban on flights from 26 European countries.
We now appear to be entering into “bear” market territory (a fall of 20% from the previous peak). Although the WHO has officially declared the Covid-19 a pandemic, with government action and social distancing measures, the spread of the virus is likely to be halted in time. Businesses will be impacted but if they are in a position to weather this storm, the economy will eventually pick back up again. The impacts at the moment depend on how long the “peak” of cases last and the amount of containment which is put in place by each country. Short term containment could lead to a quick recovery. We believe that the earliest we can expect markets to recover would be approximately 2-4 weeks after containment measures are put in place and the spread of the coronavirus is slowed. The UK is likely to enter into a ‘delay’ phase from ‘containment’ today. The reality of this is likely to continue to bring markets down until it looks like the worst of the virus is behind us.
We expect that the measures brought in by governments and central banks throughout the world will help with the recovery when it does occur. It is for this reason that we are continuing to hold our Green Path and Heritage buy and hold portfolios with their current asset allocation. We do expect markets and economies to recover, though this may take some time.
Trend-following in practice is based on past data to confirm that a trend is taking place. We do not want to be in a position when we are “whipsawing”, coming in and out of the markets too frequently. We also do not want to be in a position where we miss the uptake. Although we are basing our decisions on past data in order to determine if an upward trend has started, we will be monitoring all of our indicators with increased scrutiny and frequency to ensure that we are able to join in on the rebound as quickly as possible.
All our Guardian portfolios are outperforming their relevant benchmarks across all time periods. Although we did experience some of the market falls as we had a measured approach in reducing our exposure, our current exposure to gilts, bonds and gold has provided some return.
We are currently monitoring the markets and the covid-19 spread daily. We are reviewing a number of different trend-following signals to ensure that our current positions are accurate and to protect the funds we are ‘Guardian’ too. We take our jobs guarding your money extremely seriously and are continuously working, monitoring and discussing the current position for these portfolios. We wish you well and hope that we have allowed you one less thing to worry. If you are in Heritage and Green Path portfolios, keep calm and carry on. The markets will bounce back. And don’t forget to use lots of soap and water!