Markets in a Nutshell - February 2020

Global equities fell for the first time in five months as investors weighed the consequences of the novel coronavirus outbreak in Wuhan, China. The virus appears to be more infectious than past coronavirus strains, but thankfully less deadly. Although too early to draw any firm conclusions, it is undoubtedly going to have an impact on the global economy. The large-scale lock-downs in many Chinese cities and world travel advisories will cause significant supply chain and travel disruptions at the very least.

But, as Yuval Harari concludes in his book Homo Deus, “…the era when humankind stood helpless before natural epidemics is probably over.” The outbreak will probably peak in the coming months as containment responses and treatments start to take hold.

Developed market bond yields fell precipitously as investor risk appetite declined, while gold also offered protection. The US dollar and Japanese yen strengthened in line with their safe-haven role during times of stress.

Industrial commodities copper and oil fell sharply on fears of the pandemic impairing global growth. Emerging markets underperformed developed markets, with China at the virus epicentre and other Asian markets such as Thailand also declining. Growth sensitive commodity exporters South Africa and Brazil were among the worst performers.

In the Foord International Fund, UK-based diversified energy supplier SSE plc contributed the most to fund performance. SSE’s re-rating was driven by the Tory election win eliminating the risk of nationalisation of the firm’s assets. This was partially offset by the fund’s position in Hong Kong marquee mall owner Wharf Real Estate Investment which fell on pro-democracy protests and coronavirus panic. The managers are increasingly cautious on the preferred asset class, equities, reinstating S&P put options to June and December and hedging exposure with short futures contracts.

In the Foord Global Equity Fund, positions in Kasikorn Bank, Wynn Macau and Vipshop were the biggest detractors this month but core holdings JD.Com and Alphabet Inc were key performance contributors. The managers raised cash ahead of the market volatility, positioned to deploy capital in a potential sell-off.

The funds are exceptionally well positioned for the unfolding environment with good diversification, embedded optionality and high levels of liquidity.