Crude oil prices suffered as both Saudi Arabian and Russian producers threatened increased production (supply) amid the spread of coronavirus (COVID-19) which has reduced demand for oil for the first time in over a decade.
The Organization of the Petroleum Exporting Countries (OPEC), led by Saudi Arabia, failed to reach an agreement with Russian suppliers to cut production in support of prices and promptly announced its plans to boost production and slash its selling price. Russian suppliers immediately responded with planned production increases as well.
This development resulted in a shock drop of nearly 20% in crude oil prices, against the backdrop of increasing market volatility and weaker global growth prospects. This sudden change hit high-cost producers in Canada and the U.S. particularly hard.
Major equity markets sell off
Major market indices declined (S&P/TSX Composite Index: -10.3%; S&P 500 Index: -7.6%; MSCI EAFE Index: -5.7%) to start the week in reaction to the oil price shock and the ongoing virus outbreak. Canadian markets were heavily impacted given the prominence of the energy sector in the S&P/TSX Composite Index.
According the World Health Organization, the coronavirus strain has spread to 110 countries, areas or territories with over 110,000 confirmed cases, 4,000 confirmed casualties and 64,000 confirmed recoveries as of March 10th.
As the virus continues to spread, policy maker action continues to intensify with interest rate cuts and additional restrictions on citizens around the world. At this time, we believe the virus will continue to have an immediate negative impact on consumption, business spending, sentiment, trade and global growth prospects.
While we anticipate additional significant government policy in response to the ongoing situation – both monetary and fiscal stimulus – we believe that risks have now elevated. The possibility of a sharp rebound remains if the virus situation is contained, but the outbreak induced slowdown has increased the chances of a global recession.
Strategic asset allocation is still intact
Nothing has changed from a strategic asset allocation perspective (the long-term asset mix designed to achieve a specific rate of return at a specific level of risk) at this time. To ensure that your portfolio remains suitable to achieve your long-term financial goals with volatility you’re comfortable with, we will rebalance and maintain your portfolio in the case that market movements (positive or negative) cause your portfolio to drift too far from your strategic asset allocation weightings.
All MD portfolios have been built to withstand market volatility and the MD Fund family remains conservatively positioned overall. Since I joined MD Financial Management in 1999, I have witnessed our resilience through the Technology Bubble popping and the 2008 Financial Crisis. I remain confident that the strategies we have in place will serve our clients well through time.
Tactically getting defensive: Adjusting to the latest information
As mentioned in our previous update, we’ve been proactive and thorough in our assessment of the situation and our tactical portfolio positioning. Since early February, we’ve integrated risks related to the virus into our tactical asset allocation process.
As a number of market indicators continue to deteriorate, we’ve made some additional adjustments that are defensive in nature.
For clients following our tactical asset allocation advice in their portfolios, we’ve reduced stock market risks further. Overall, we’ve reduced our allocation to equity investments to a slightly underweight position relative to fixed income and our long-term strategic asset allocation target:
- We have proportionately reduced our allocation to Canadian equities and remain neutrally positioned. Historically, Canada is relatively defensive, but high exposure to oil prices adds uncertainty.
- We have proportionately reduced our allocation to U.S equities and remain overweight. We still prefer the U.S. over international markets, which are displaying higher risks of recession.
- We have proportionately reduced our allocation to International equities and remain slightly underweight. Within international markets, we’ve shifted to more defensive markets (Australia, Switzerland) from cyclical markets (Germany, France). We also removed underweights to Asian markets (Hong Kong, Singapore) that appear to have better contained the virus.
- We remain underweight emerging market equities.
- We increased our allocation to fixed income investments and are now neutrally positioned. Bond yields have fallen, and we don’t believe they will move materially higher until the virus situation is seen as contained. We removed our short-duration (less interest rate sensitive) bias.
- We reduced our allocation to cash to fund our latest fixed income positioning.
As the situation continues to develop, we will continue to diligently assess market conditions and make further adjustments if needed. It’s important to us that your portfolio is appropriately built to achieve your long-term financial goals with respect to your comfort with risk and volatility. If you have any questions about this latest update, or about your portfolio, please contact your MD Advisor*.
* MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec).