HH Coronavirus: A Black Swan Event For Global Equity Markets

Although China fared relatively well on the back of the country’s central bank providing fiscal stimulus to the economy, some traditionally defensive markets, such as Thailand and South Korea, failed to cushion the market panic. Among sectors, communication services, real estate and health care stocks fared slightly better than the broader market (albeit still down), while energy was the weakest sector.

How has our risk-managed equities portfolio performed?

The strategy favours industries such as telecommunications, utilities and pharmaceuticals, which are relatively immune to economic cycles and have more defensive characteristics. These companies provide products and services that are needed in both good and bad times. On the other hand, the portfolio is less exposed to retailing and media & entertainment when compared to the market index.

Since the start of the outbreak, the strategy has outperformed the MSCI ACWI index, with both our allocation and selection contributing. Our overweight allocations to telecommunications and utilities and an underweight in energy, were positive. In contrast, our underweight allocations to software and semiconductors proved to be a headwind.

Downside protection during a black swan event

To better understand the market impact of the current outbreak, we examined the response of our risk-managed global equities strategy during other similar situations, analysing relative performance during the 2009 H1N1 Pandemic Influenza, the 2013 Avian Influenza A (H7N9) and the Ebola Virus from 2014 to 2016. As shown below, the strategy tends to exhibit a smaller drawdown than the broader market when such black swan events occur.

black swan event

Consequences on the portfolio

We are keeping a close eye on the development of the COVID-19 crisis and are currently reviewing our exposure to Thailand, which is one of our largest overweights, and envision a significant trimming in our emerging market portfolios.

Since the outbreak, Thailand has been hit hard due to its high exposure to tourism, particularly from China. The tourism industry represents roughly 15% of the country’s GDP and Chinese tourists account for 1 out of 3 international arrivals. Thailand also entered this challenging period with relatively weak economic momentum and exports, as well as tourism, will take a hit short-term. In response, the central bank has cut interest rates to 1% (an historical low) and with a 40% government debt to GDP ratio, there is ample room for a large fiscal stimulus package.

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