Global equity market volatility has spiked this week as investors grapple with the uncertainties created by the spread of the Coronavirus outside of China (we wrote about this in detail in Monday’s Coronavirus Update). While most headline equity indices have now erased year to date gains and entered into correction territory, we have observed a dispersion in returns among sectors, industries, and companies that is worth expanding upon.
Areas of the market associated with commodity prices have been among the hardest hit as falling demand for oil and other material inputs to global growth have driven prices lower. Similarly, travel and hospitality company stock prices have faced pressure as global travel has slowed amid fears of contagion. Companies with critical supply chains located in China and other developing nations have also been sent lower by the market as concerns mount that factories will remain closed for extended periods of time, creating a supply/demand imbalance.
On the flip side, companies with more classic defensive characteristics such as local utilities have held up well. Companies with capital light business models that offer service-oriented solutions like software companies continue to perform well as their operations and customer base remain unaffected. Unsurprisingly, safe-haven assets such as U.S. treasuries and gold have delivered positive returns.
During times like these, we are vigilantly evaluating risk and opportunities in the market, asset class by asset class, and count on our active managers to take advantage of specific company by company opportunities. During the past few days, our research team has been in close contact with our investment managers to gauge their positioning, understand actions they are taking, and help provide bottom-up context to larger market moves.
Our investment managers are taking a thoughtful approach to managing through the current market volatility. Value-oriented managers have been patient about buying into lower valuations, particularly in the emerging markets where the teams have been closely following the implications of Coronavirus since news of the outbreak first spread. These managers have viewed the recent market pull-back as an overdue response and have primarily avoided buying into the market as it began to sell off early in the week. The investment managers we employ to invest in companies with growth-oriented businesses, primarily in the technology and communication services spaces, have performed well on a relative basis. These managers tend to focus their research on secular trends, innovation, and competitive advantages leading them to invest in companies they expect to grow earnings at above-market rates over long time horizons. These businesses are generally less sensitive to economic factors and volatility related to near-term market uncertainty has historically presented buying opportunities for these companies.
In the bond markets, dispersion has been less pronounced so far. Safe-haven assets such as high-quality municipal bonds and U.S. treasuries have performed well. Even high yield bond managers have been able to protect capital relatively well compared to similar equity market sell-offs in the past. Managers we spoke to who traffic in less efficient markets such as listed closed-end funds, have begun to see new valuation opportunities as investor sentiment has shifted throughout the week.
We continue our diligent analysis as markets evolve with uncertainty stemming from real and forecasted economic threats due to the spread of Coronavirus. The challenge ahead of us is to determine whether a global recession is likely to result. When our market cycle dashboards are updated next week, we anticipate that we will still see a positive reading as underlying economic data is not likely to shift as rapidly as investor sentiment has in this past week. We will continue to communicate regularly as our viewpoints evolve in this dynamically changing environment.