Containing coronavirus: Short-term market conditions have changed

February 28, 2020 Ian Taylor

Latest reports indicate that the coronavirus strain COVID-19 has spread to 47 countries with over 81,000 confirmed cases, 2,700 confirmed deaths and 33,000 confirmed recoveries (as of February 27th). As doctors and governments around the world wrestle to contain the virus, we here at MD have been analyzing economic indicators for signs of change.

Market conditions have changed

As mentioned in my original post about the impact of the coronavirus outbreak on investors, we’ve been expecting a negative short-term impact on markets. At the time we were quite comfortable with our tactical positioning and remained confident, albeit on alert.

We’ve been proactive in our assessment of the situation and our portfolio positioning. More specifically, we have been paying additional attention to the following:

  • Credit markets for signs of increasing risk to the economy and an increase in recession probability.
  • Policy maker actions, especially the response by Beijing as the situation escalates.
  • Company actions, as they issue guidance regarding their exposure to the situation and announce ongoing earnings.
  • Signs of market contagion, given that the impact of the virus has mostly been contained to Chinese markets.
  • Higher frequency economic data and surveys for signs of change to the economic story, which was improving at the start of the year.

Given this ongoing analysis, a number of market indicators have changed, and we’ve made some tactical portfolio adjustments as a result.

Our focus is still on long-term results, but we’ve adjusted for short-term conditions

Entering 2020, the global economy looked set to expand, albeit at a slow pace, relative to the last decade. Leading up to the coronavirus outbreak, incoming data had been confirming these expectations. As the virus spread, we’ve seen a deterioration in the areas above in addition to the other risks we had previously identified. Over the short-term, we believe that government policy makers are limited in their ability to offset the global supply shock caused by the virus.

As a result, we have removed our tactical overweight to equities. We have moved to a neutral position relative to our long-term strategic asset allocation targets:

  • We have slightly reduced our allocation to Canadian equities and are now neutrally positioned.
  • We have proportionately reduced our allocation to U.S. equities but remain slightly overweight.
  • We have proportionately reduced our allocation to international equities and are now neutrally positioned.
  • We remain underweight emerging market equities.
  • We remain underweight fixed income.
  • We have increased our allocation to cash to an overweight position.

As always, our goal for MD Funds and Portfolios is to provide our clients with the tools to achieve their long-term financial goals with respect to their comfort with risk and volatility. While the outbreak is unfortunate – my thoughts are with those impacted by the virus – from an investment perspective, it is likely a short-term bump in the road.

With that being said, we will continue to diligently assess market conditions as the situation unfolds and make adjustments when necessary. For more information, please contact your MD Advisor*.

* MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec).

About the Author

Ian Taylor

Ian Taylor, CFA, is an Assistant Vice President with the Multi-Asset Management team at MD Financial Management. He oversees strategic and tactical asset allocation mandates, alternative investment mutual funds and is a member of MD’s Tactical and Risk Allocation Committee.

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