In our 2020 Outlook published last month, we forecasted a global economic upswing driven by a combination of central bank easing and fiscal stimulus. Consistent with this prediction, global manufacturing & service PMI’s surged in January. In the US, consumer confidence continues to rise, wage growth is rebounding, and labor force participation is at a 7yr high; this implies more upside for consumption (70% of the US economy). Indeed, the Macro is on the mend! And it’s no wonder, aggregate financial conditions are about as easy as they ever get (chart 1).
Unfortunately, an exogenous shock has created a new headwind for risk markets: China’s coronavirus. The epidemic is likely to depress global growth over the next couple months. While it is too early to estimate with confidence the full impact of the virus on China’s economy, the extremity of the measures taken by the Chinese government will inevitably have a sizeable negative effect on first quarter data. Companies with significant operations in China will likely issue profit warnings over the coming weeks and the near-term economic data is likely to disappoint. But there are good reasons to hope the spread of the disease will be contained in the coming weeks.
For one, the Chinese government has been proactive. The Lunar New Year holiday was extended to keep businesses closed and major cities stopped running public transportation. A declining daily number of new cases in China already suggests progress in limiting the outbreak (chart 2). And critically, despite recent flareups, the number of cases outside the Hubei province of China remains low. If the epidemic is contained, most of the lost activity can be recovered and growth should bounce back forcefully in the second quarter. During the Sars epidemic in 2003, Chinese growth fell from 10.8% in Q1 to 5.5% in Q2 on a quarter over quarter basis, only to snap back to 14.7% in Q3. In sum, the coronavirus should have a large, but short-lived impact in China, with little spillover into the global economy. Once it’s clear the rate of new infections has peaked, investors will once again focus on the improving underlying picture. This picture will be broadly favorable for Asian equities.
With this month’s positioning, we are buying into the fear that was priced into Asian markets and adding a position to Asia-ex Japan equities. But our positioning still reflects caution over the short term.
Finally, know that our Global Tactical strategies will adapt to fundamental, not emotional influences. We seek opportunities for solid risk adjusted returns and to preserve capital in risk downturns.
Recent Portfolio Changes
We trimmed our position in emerging market bonds and initiated a position in Asia ex-Japan equities. If the coronavirus is contained, which is our base case, investors will once again focus on the improving underlying picture. This picture will be broadly favorable for Asian equities. Valuations favor Asian equites over bonds.
Since November 1, 2019
We initiated a position in cash. As risks persist across asset classes, and with 1-3 month treasury yields near 2%, an elevated position will help shield the portfolio from volatility.
Fixed Income (US)
We continue to be overweight in our position to Ultrashort Duration Bonds. We believe the long-term path for government bond yields is higher. We continue to see duration as a risk and favor short term High Yield Bonds and Ultrashort Duration at the expense of allocations to long-dated fixed income.
We maintain our position in Preferred Stocks. We maintain our conviction to the position. We expect the asset class’s attractive yield and positive tailwinds will continue to provide diversification benefits to the portfolio.
We initiated a position in short-term High Yield Bonds. In a rates up world, we prefer credit risk to duration risk. We believe that short term High Yield Bonds are a great value proposition in this environment.
We initiated a position in 7-10 year Treasuries. Stocks need to work off overbought conditions before moving higher. We believe 7-10 year treasuries will provide a ballast for the portfolio as a tactical hedge.
Fixed Income (International)
We increased our position in Emerging Market Bonds. Given solid sovereign fundamentals, we believe that Emerging Market Bonds provide attractive yield and portfolio diversification.
We initiated a position in Emerging Market Local Currency Bonds. As global growth recovers, the dollar should weaken. Emerging market local currency bonds provide an excellent dollar hedge and deliver attractive yields.
We maintain positions in Quality equities. We believe that Quality equities possess pricing power, exhibit strong profitability, and have additional sustainable competitive advantages which allow businesses to remain viable over time. We feel this holding is prudent in the later stages of the US credit cycle.
We initiated a position in Value equities. We believe that Value equities provide yield at a reasonable price, are historically cheap relative to other style factors, and should outperform as the macroeconomic backdrop recovers.
We maintain a position in Emerging Market equities. We expect easing financial conditions to re-accelerate global growth and international stocks to participate. Underlying fundamentals in emerging markets are turning up. Further Chinese stimulus should boost global growth and asset prices.
We maintain a position in Broad European equities. We expect easing financial conditions to re-accelerate global growth and international stocks to participate. Accommodative global monetary policy offers support across the board, but we see opportunities in Europe.
We maintain a position in International Quality equities. We maintain our conviction to Quality factor exposure and upgraded our ex-US regional exposure.
We initiated a position in Asia ex-Japan equities. If the coronavirus is contained, which is our base case, we expect investors will once again focus on the improving underlying picture. This picture will be broadly favorable for Asian equities.
We initiated a position in Broad Commodities. We expect oil and industrial metals prices will move higher as economic growth recovers. Relative commodity valuations are favorable and with interests so low, real assets could provide diversification.
Please do not hesitate to contact our team with any questions. You can get more information by calling (800) 642-4276 or by emailing AdvisorRelations@donoghue.com. Also, visit our Contact Page to learn more about your territory coverage.
John A. Forlines, III
1 Information as of 2/11/2019. Individual account allocations may differ slightly from model allocations
2 Contains international exposure
Past performance is no guarantee of future results. The material contained herein as well as any attachments is not an offer or solicitation for the purchase or sale of any financial instrument. It is presented only to provide information on investment strategies, opportunities and, on occasion, summary reviews on various portfolio performances. The investment descriptions and other information contained in this Markets in Motion are based on data calculated by W.E. Donoghue & Co., LLC (W.E. Donoghue) and other sources including Morningstar Direct. This summary does not constitute an offer to sell or a solicitation of an offer to buy any securities and may not be relied upon in connection with any offer or sale of securities.
The views expressed are current as of the date of publication and are subject to change without notice. There can be no assurance that markets, sectors or regions will perform as expected. These views are not intended as investment, legal or tax advice. Investment advice should be customized to individual investors objectives and circumstances. Legal and tax advice should be sought from qualified attorneys and tax advisers as appropriate.
The JAForlines Global Tactical Allocation Portfolio composite was created July 1, 2009. The JAForlines Global Tactical Income Portfolio composite was created August 1, 2014. The JAForlines Global Tactical Growth Portfolio composite was created April 1, 2016. The JAForlines Global Tactical Conservative Portfolio composite was created January 1, 2018.
Results are based on fully discretionary accounts under management, including those accounts no longer with the firm. Individual portfolio returns are calculated monthly in U.S. dollars. Policies for valuing portfolios and calculating performance are available upon request. These returns represent investors domiciled primarily in the United States. Past performance is not indicative of future results. Performance reflects to re-investment of dividends and other earnings.
Net returns are presented net of management fees and include the reinvestment of all income. Net of fee performance was calculated using a model fee of 1% representing an applicable wrap fee. The investment management fee schedule for the composite is: Client Assets = All Assets; Annual Fee % = 1.00%. Actual investment advisory fees incurred by clients may vary.
W.E. Donoghue & Co., LLC (Donoghue) claims compliance with the Global Investment Performance Standards (GIPS®).
The Blended Benchmark Moderate is a benchmark comprised of 50% MSCI ACWI, 40% Bloomberg Barclays Global Aggregate, and 10% S&P GSCI, rebalanced monthly.
The Blended Benchmark Conservative is a benchmark comprised of 35% MSCI ACWI, 55% Bloomberg Barclays Global Aggregate, and 10% S&P GSCI, rebalanced monthly.
The Blended Benchmark Growth is a benchmark comprised of 65% MSCI ACWI, 25% Bloomberg Barclays Global Aggregate, and 10% S&P GSCI, rebalanced monthly.
The Blended Benchmark Income is a benchmark comprised of 80% Bloomberg Barclays Global Aggregate Bond Index, 10% MSCI ACWI, and 10% S&P GSCI, rebalanced monthly.
The MSCI ACWI Index is a free float adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets. The S&P GSCI® is a composite index of commodity sector returns representing an unleveraged, long-only investment in commodity futures that is broadly diversified across the spectrum of commodities. The Bloomberg Barclays Global Aggregate Index is a flagship measure of global investment grade debt from twenty-four local currency markets. This multi-currency benchmark includes treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging markets issuers.
Index performance results are unmanaged, do not reflect the deduction of transaction and custodial charges or a management fee, the incurrence of which would have the effect of decreasing indicated historical performance results. You cannot invest directly in an Index. Economic factors, market conditions and investment strategies will affect the performance of any portfolio, and there are no assurances that it will match or outperform any particular benchmark.
Policies for valuing portfolios, calculating performance, and preparing compliant presentations are available upon request. For a compliant presentation and/or the firm’s list of composite descriptions, please contact 800‐642‐4276 or email@example.com.
W.E. Donoghue is a registered investment adviser with United States Securities and Exchange Commission in accordance with the Investment Advisers Act of 1940.