OVERVIEW

In February, financial markets were dominated by the uncertainty surrounding the spread of the coronavirus and its potential impact on supply chains, global trade and growth. Equity markets fell sharply amid this uncertainty while government bond valuations increase as the flight-to-safety accelerated.

MONTH IN REVIEW

In contrast to its bone-chilling finale, February started strongly. Expectations that the negative effects of the coronavirus would be temporary and localized combined with new robust economic data, was enough to offset the initial economic risks associate with the virus and push the S&P 500 index to new record highs. However, the market’s immunity to the now infamous COVID-19 virus was short-lived. The spread of the virus beyond China created fresh uncertainty for the global growth outlook and sparked volatility in financial markets.

Equities tumbled during the last week of February resulting in the worst week for Wall Street since the global financial crisis in 2008. The S&P 500 fell as much as 11.2% from its record high close hit on Feb. 19, ending the month down 8.2%.

Elsewhere, Eurozone equities experienced a sharp fall amid concerns that the impact of the coronavirus could send the already ailing eurozone economy into recession. In contrast, February marked the beginning of a possible Chinese recovery as infection rates appeared to stabilize and some production activity picked up, albeit slowly, resulting in a modest gain in regional markets over the month.

A flight-to-safety market sentiment dampened investors risk appetites and drove the U.S. 10-year Treasury yield to a new record low of 1.15%, down from 1.51%, while the 30-year yield dropped from just over 2% to 1.67% resulting in an increase in bond valuations (as yields move inversely to bond prices). The risk-off sentiment weighed on riskier corporate credit, with considerable investor outflows from high yield bonds widening previously razor-thin spreads.

BEST AND WORST

Healthcare: With all sectors of the equity market feeling the effects of the virus, even traditional safe haven defensive equities such as Utilities faltered. Healthcare suffered a less dramatic decline with demand supported for obvious reasons as the virus spread, ending the month down 6.6% with Real Estate and Communication Services finishing in similar territory.

Energy: With demand for oil dropping sharply across the board as a result of the global production slow down, OPEC look set to cut over 1 million barrels of oil a day from their already-reduced output levels, in what looks like an increasingly desperate effort to stabilize the world oil market. This reduced demand saw the energy sector finish the month as the worst-performing sector by a substantial margin, down 14.6% for the month.

MARKET REVIEW

Predicting the ultimate scale and impact of the outbreak is near impossible with question marks around the potential severity, scope and longevity still hanging over markets. The original base case scenario of a ‘v-shaped’ recovery whereby we experience a sharp decline in economic activities, followed by a rapid recovery driven by pent up demand may now be ‘U-shaped’ in some regions with a rebound taking longer to get off the ground in harder-hit areas.

As the virus persists into Q2 there is the potential for it to pose a more substantial strain on global growth. The original supply-side contraction saw factory shutdowns imposed in an attempt to contain the virus, depriving companies elsewhere of the materials they need for their own business, ultimately weighing on global supply. Demand contraction is also emerging as worried consumers are reluctant to shop, travel and eat out because of contagion fears. As this twin supply-demand shock unfolds, the pressure mounts on both Central Banks and Governments to provide further monetary and fiscal stimulus.

In markets, visibility is key and as long as the fog of uncertainty brought on by the COVID-19 virus persists, equity markets will remain in choppy waters and treasuries will remain well bid despite the low yield offering. At Holdun, our uncorrelated Alternative Investment Funds offer shelter from the oscillation of the volatile equity market without sacrificing your upside return potential.

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