Market Commentary
It goes without saying that the first quarter was one of the most challenging markets that many of us have ever experienced, with March proving to be the most volatile month ever in the history of US equity markets.
This sell-off marked the swiftest on record and absent emergency rate cuts, central bank liquidity, and a massive stimulus plan – things would have been much worse in both equities and bonds. While April has brought greener pastures to the equity markets, this COVID-19 situation is unprecedented and the economic outcomes are highly uncertain with respect to timing and what things will look like after stabilization and the workforce returns.
Although it might seem the case, all investment portfolios are not built the same and a market such as the one we are presently encountering is certain to expose weaknesses and structural flaws which will likely prove costly if not properly addressed.
At Anchor Pacific, we have been cautious on equity markets, both public and private, which had been overvalued for some time. We have observed investors indiscriminately chasing return and income with little to no regard for risk. Lastly, we have observed what we would characterize as “a false comfort from diversification”, meaning that portfolios, while touted as diversified really, weren’t, especially under the severe market stress we experienced.
With this paradigm shift, risk management will matter once again and with market volatility likely to remain elevated, now and not later is the time to take a hard look at asset allocations, measure true liquidity within portfolios and critically assess existing private strategies such as real estate and private equity and lending.
The good news is that there is going to be a significant opportunity to achieve equity-like gains in many areas of the credit markets, especially in the structured markets where future distressed selling is likely to take place as more leverage gets unwound – we have significant experience with these sectors and are presently preparing to position client portfolios accordingly.
This is not our first financial crisis nor will it be our last – both Steve and Jon each have in excess of 25 years of protecting and preserving capital through multiple periods of financial stress. Disciplined risk management (framework, structure and process) and intelligent diversification (via portfolio construction) remain one’s best edge in a market such as this. Capable and competent leadership and a high level of technical expertise are of tantamount importance in successfully reaching the other side.
Our adaptive multi-asset portfolios are designed to provide durable returns and reduce risk – these traits buffered our investors and are more needed than ever in today’s new economic reality. As always, we remain attentive to changes and prepared for a range of outcomes.
Market Performance
There were very few bright spots in the quarter excepting US Treasuries, USD and duration/interest rates. The good news is that valuations are now much more attractive as all risk assets cheapened substantially. For the first time in recent years, most global equity markets are now cheap to their historical Cyclically Adjusted Price Earnings Ratios (CAPE) per Research Affiliates. The problem is the economic uncertainty as a result of COVID-19 and whether the “E” in earnings is actually relevant. Credit markets cheapened considerably relative to equities and there are many compelling opportunities to achieve equity-like gains given the margin of safety built into present valuations.
North American Equity Markets
Canada: TSX composite -21.10%, TSX 60 –18.62%, TSX Small Cap -37.94%
US: Total Market -20.84%, S&P 500 -19.43%, S&P 500 (C$) -13.11%, Russell 2000 -30.65%
International Equity Markets
EAFE Developed: FTSE EAFE -23.99%, FTSE Europe -25.66%, FTSE Asia Pacific -20.70%
Emerging: FTSE -24.41%
Bond markets
Canada: Total Market -0.24%, IG Credit -5.00%
US: Total Market +3.09%, Short Govt +2.72%, Medium Govt +10.50%, Long Govt +22.16%, IG Credit -2.97%, High Yield -12.75%
Currency Markets
USD Index +3.31%, CAD -7.68%, Yen +0.87%, Euro -1.88%
Commodity Markets
Broad Index -42.63%, Gold +3.6%
Global Equity Market Valuations – Valuations and Total Risk Returns:
(Source – iShares US, Blackrock, Research Affiliates)
Global Equity Market Valuations – Price Earnings Ratio:
(Source – iShares US, Blackrock, Research Affiliates)
Download the complete First Quarter 2020 Market Commentary and Performance:
Anchor Pacific Investment Management Corp. (“Anchor Pacific”) is a Vancouver, BC-based portfolio management firm, which leverages process, technology, and infrastructure to democratize the process of managing endowment and pension style investment portfolios to deliver innovative, high-touch, and transparent investment programs across the full spectrum of asset owners and investment consumers.
To learn more about how Anchor Pacific can help you shelter, protect, and grow your money, contact us at 604-336-9080 or info@anchorpacificgroup.com
Comments