- The rapid spread of the novel coronavirus (COVID-19) outside of China alongside recent changes in several economic indicators have diminished the outlook for global economic growth via reduced demand as well as supply chain disruptions. Correspondingly, our research indicates a negative outlook for European, Japanese and Emerging Market equities; while U.S. equities has shifted to a mixed outlook.
- The model’s preference in fixed income continues to favor intermediate-term U.S. Treasuries, both nominal and inflation-protected, which can provide support in deflationary and credit contraction conditions. The outlook for Credit remains mixed to negative with the risk of investment grade and high yield spreads continuing to widen.
- Gold maintains a positive outlook from declining real (inflation-adjusted) yields and continues to prove itself as a safe haven against global uncertainty. The outlook for Commodities has declined given the market’s updated expectation for slowing growth.
In the last weeks of February, global equity markets experienced a severe selloff amid escalating fears of contagion as cases of the coronavirus (COVID-19) spread well beyond China. Increased fears of a pandemic could dramatically impact future global economic growth through both reduced economic demand as well as the potential for significant global supply chain disruptions. As the crisis continues, central banks and governments around the world have responded by supporting their economies with policy measures that may or may not serve to calm fears in the financial markets at least in the short-term.
Among the equity asset classes that we model, U.S. equities remain the most attractive, though the outlook is less positive than it was a month ago as investor psychology has shifted abruptly from positive to uncertain. According to our model research U.S. equities remain overvalued despite the S&P 500 index decline of over 10% from its mid-February high. Correspondingly, our research indicates a negative outlook for European, Japanese and Emerging Market equities.
The model’s preference in fixed income continues to favor intermediate-term U.S. Treasuries. Throughout the final days of February, yields on U.S. Treasuries continued to fall to all-time lows, seemingly on a daily basis, as the yield on the 10-year U.S. Treasury declined below 1.10% (an all-time low) and investors considered the possibility that the yield on the 10-year U.S. Treasury could go below 1.00%. Regarding credit, the decline in the global equity markets was accompanied by a widening of credit spreads as concerns of an economic slowdown caused investors to reconsider the safety of corporate borrowers and their ability to rollover their debts in the face of revenue shortfalls brought on by the coronavirus crisis.
Gold maintains a positive outlook from declining real (inflation-adjusted) yields and continues to prove itself as a safe haven against global uncertainty particularly in light of the fear of the continued spread of the virus. Gold did experience a minor sell-off towards the end of the month as investors sold some of their holdings in gold to meet margin calls. The outlook for Commodities has declined given the heightened economic uncertainty and increased potential for a more substantive slowdown in growth.
\Short-Term Fixed Income & Cash remain attractive serving as dry-powder to reinvest in assets at potentially lower prices in the future. In addition, gold and U.S. Treasuries provide the potential for upside opportunity and downside protection should the equity markets continue to sell-off.
ABOUT 3EDGE ASSET MANAGEMENT
3EDGE is a multi-asset investment management firm that utilizes a proprietary model to analyze market valuation metrics (long-term), economic forces (medium-term), and investor behavioral factors (short term) that we believe drive the global capital markets. Our team of professionals draws on decades of investment management experience and their research in quantitative methods, including system dynamics, machine learning, artificial intelligence, and multi-player game theory to seek to identify undervalued and overvalued asset classes across the globe that may be poised to enter a period of market outperformance or underperformance. While we aim to generate attractive risk-adjusted returns, we also prioritize risk-management in an effort to limit portfolio declines for our clients, particularly during periods of extreme market disruptions. Our clients include individuals, family offices, institutional investors, and registered investment advisors.
CHANGE TO ASSET ALLOCATION ACROSS MAJOR ASSET CLASSES (TRAILING 12 MONTHS)
3EDGE GROWTH STRATEGY
3EDGE TOTAL RETURN & ESG STRATEGIES
3EDGE CONSERVATIVE STRATEGY
DISCLOSURES: This commentary and analysis is intended for information purposes only and is as of March 5, 2020. Allocations shown above reflect target allocations for the 3EDGE Growth, ESG, Total Return and Conservative Strategies (the “Strategies”) as of the date the allocation change was made and individual investor allocations may differ. This commentary does not constitute an offer to sell or solicitation of an offer to buy any securities. The opinions expressed in “View from the Edge” are those of Mr. Folts and Mr. Biegeleisen and are subject to change without notice in reaction to shifting market conditions. This commentary is not intended to provide personal investment advice and does not take into account the unique investment objectives and financial situation of the reader. Investors should only seek investment advice from their individual financial adviser. These observations include information from sources 3EDGE believes to be reliable, but the accuracy of such information cannot be guaranteed. Investments including common stocks, fixed income, commodities and ETFs involve the risk of loss that investors should be prepared to bear. Investment in these Strategies entails substantial risks and there can be no assurance that the Strategies’ investment objectives will be achieved. Past performance may not be indicative of future results. *Short-Term Fixed Income and Cash includes cash, cash equivalents, money market funds, and fixed income funds with an average duration of 2 years or less. Intermediate-Term Fixed Income includes fixed income funds with an average duration of greater than 2 years and less than 10 years. Real Assets (Gold & Commodities) includes precious metals such as gold as well as investments that operate and derive much of their revenue in real assets, e.g., MLPs, metals and mining corporations, etc.