Markets under pressure: all you need to do is stay calm
Dear friend of AQUMON,
Due to the larged sized monetary stimulus driven rallies in U.S. stocks we saw last Monday (+4.60%) and Wednesday (+4.22%) the market managed to hold off the selloff late in the week and we saw the U.S. S&P 500 Index return +0.61% for the week. European stocks continued to see selling pressure with the Euro Stoxx 50 Index -2.93% last week. Hong Kong and China stocks held up well relative to the Asia region with the Hang Seng Index and the CSI 300 Index +0.06% and +5.04% last week respectively.
Even with stocks up flight to safety mentality amongst investors remains high with the U.S.’ fear index the VIX closing the week at 41.94 which are levels not seen since September of 2011. Investors continue to buy up safe assets driving the U.S. 10 year treasury yields below historical levels of 1% at 0.77%. Gold also saw a sizable bounce upwards last week of +5.56%.
AQUMON’s diversified ETF portfolios are +0.3% (defensive) to +1.07% (aggressive) this past week and +1.25% (defensive) to -6.18% (aggressive) year to date. Positive return drivers for our portfolios last week were high grade bonds, China stocks and gold.
Monday Update: We see a larged sized selloff in the oil market (Brent crude oil is down 21.54% by Monday 6pm Hong Kong time after recovering more than 10% since the open) due to a new dispute between Saudi Arabia and Russia but AQUMON’s clients don’t need to worry since their exposure to oil-related assets is less than 2.2% even for our aggressive portfolios. We are also paying close attention to indirect impact to high yield bonds and currencies.
The coronavirus’s impact on the United States
As we’ve been saying for multiple weeks the impact of the coronavirus on the world’s largest economy is something we are closely monitoring. For those of us in Hong Kong and Asia we are just starting to see what we experienced the past 2-3 months repeat in the U.S. and Europe.
Even though there are only 447 confirmed cases as of Sunday in the U.S. at least 8 states including New York and California have declared state of emergencies. Large scale events such as the 400,000+ attendance-sized South by Southwest (SXSW) music, film and technology conference along with about 30+ other large scaled conferences, concerts, meetings across the U.S have now been cancelled. Last week technology companies such as Apple, Google, Twitter, Microsoft (and other non-tech companies) have requested employees work remotely from home.
The coronavirus is starting to impact people in the U.S. on a human and business level.
Will the healthcare infrastructure hold up?
One area we are closely looking at is the healthcare infrastructure particularly in the United States. This coronavirus situation could significantly take a turn for the worse if the healthcare infrastructures gets overwhelmed.
As we are seeing currently in Italy, where their population is 2nd oldest in the world with 29.4% above 60 years old according to the United Nations, their hospitals are quickly testing its limits in terms of serving coronavirus patients that require hospitalization and in more serious cases intensive care. As of Sunday there are 5,883 people infected in Italy with close to higher than normal levels of 10% requiring intensity care according to the European Society of Intensive Care Medicine (ESICM). This may be a product of Italy’s aging population where the elderly have more underlying health issues which makes them more vulnerable.
It’s still too early to tell but if the United States is unable to contain the coronavirus transmission meaningfully and quickly this could cause a sizable strain on their healthcare infrastructure which will amplify the problem. According to the American Health Association (AHA), there are 924,107 staffed hospital beds in the United States in 2020. Occupancy rates since 2010 have hovered around 65% according to the Centers for Disease Control and Prevention (CDC) which mathematically leaves around 320,000 empty beds (naturally they could add more beds in an emergency basis). This doesn’t leave a lot of room for a sudden surge in patients potentially needing hospitalization.
It is not all that bad on an economic front
Last Friday’s U.S. jobs report showed the U.S. economy positively added 273,000 jobs in February which continued January’s strong employment numbers and was the biggest monthly increase since May 2018. Manufacturing jobs also increased 15,000 new jobs along with unemployment rate remaining at historical low levels of 3.5%. Although this is more backwards looking (relative to the recent coronavirus selloff) at least we can say that the U.S. economy is starting on a positive note.
Furthermore monetary stimulus by multiple central banks including the U.S.’ Federal Reserves’ recent 50 basis point emergency interest rate cut has provided some limited uplift to the market. Many eyes are now on the European Central Bank’s (ECB) upcoming meeting this Thursday and seeing if they will take further action.
These stimulus actions likely won’t solve all our market headwinds (plus many central banks may be lacking ammunition given they are already in negative or close to 0% interest rate levels) but it will help soften the blow if needed.
What does that mean for investors?
We could be looking at a rough ride ahead but when others overreact it is even more important we stay calm. As long we are not taking unnecessary risk by being very concentrated in a small number of investments or risky investments the markets won’t break our backs. There a 3 things as investors you need to think about:
1) Review and diversify your portfolio:
Like spring cleaning, if you haven’t already done, so it's a good time to look at your overall investment portfolio (including beyond your AQUMON portfolio). Is your overall portfolio too concentrated in 1 asset class (e.g. stocks/bonds), region (e.g. home biased in Hong Kong) or a single company/investment? Are these investments not in-line with your long term investment goals and risk tolerance? If your answer is “yes” for either then it may not hurt to make some minor adjustments to your overall investment portfolio.
2) Potentially tune down your portfolio’s risk:
One thing we’ve been talking to investors who feel the recent volatility is a bit much for them to handle is tune down your portfolio’s risk so in most simplistic terms you’re holding less stocks and more bonds as a result. AQUMON’s clients can easily do this in the ‘Holdings’ page of their portfolio via the “Adjust Portfolio Allocation” function.
AQUMON’s defensive to moderate ETF portfolios have weathered this recent volatility quite well returning +1.04% (defensive) to -2.41% (moderate) year to date relative to the U.S.’ S&P 500 Index which is -10.68%.
Naturally investors may miss the full effect of a rebound down the road but there’s obviously value to sleeping soundly at night.
3) Systematically add little by little to lower your portfolio’s cost: As a long term investor you should be doing this already but as we mentioned on multiple occasions there will likely be higher volatility ahead in the next few months as this situation unfolds. It may feel a little scary going forward but periodically and systematically lowering your cost will be beneficial for your investment portfolio in the long run. You can always control how much (or how little) to add during the volatile period.
If your portfolio is diversified enough, you are comfortable with your risk levels and are calmly building up your portfolio then you’re in a much better spot than most investors to make sound investment decisions amidst this recent market volatility.
Thank you again for your continued support for AQUMON, stay safe outside and happy investing!
Ken
P.S. On a personal note we noticed that in the past 2 weeks that many people are back out on the streets of Hong Kong reminiscent of our lives 2-3 months ago. Given the coronavirus is a developing and fluid situation we wanted to remind everyone to stay vigilant and safe particularly when outside!
About us
As a leading startup in the FinTech space, AQUMON aims to make sophisticated investment advice cost-effective, transparent and accessible to both institutional and retail markets, via the adoptions of scalable technology platforms and automated investment algorithms.
AQUMON’s parent company Magnum Research Limited is licensed with Type 1, 4 and 9 under the Securities and Futures Commission of Hong Kong. In 2017, AQUMON became the first independent Robo Advisor to be accredited by the SFC.
AQUMON’s investors include Alibaba Entrepreneurs Fund, Bank of China International and HKUST.
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