We ended our last commentary of 2019 with cautious optimism, stating that the “closures” that came through in December, both in UK politics and with regards the US-China trade disputes, left the world on a stronger footing. We expected some volatility along the way in 2020, however. What we hadn’t anticipated was for global economies and markets to be affected by a health crisis of the scope of the one that started recently in China and is now spreading fast across the globe.
While investors started the year with a pause after the very strong performance of so-called risk assets in December, the coronavirus outbreak gave an excuse for cautious positioning to prevail again, at least in the short-term. Global equities and, particularly Asian ones being in the eye of the storm, gave back some of their recent gains, while government bonds resumed their march higher. In the commodities space, without much surprise, gold was an investors’ favourite, while industrial metals and oil, both sensitive to economic growth, suffered strong losses.
Without wanting to belittle in any way the impact that the coronavirus outbreak has -and will likely continue to have- on thousands of people’s lives, as investors, it is important to try to assess the situation objectively. As it currently stands and despite the quick escalation in cases, the virus is neither highly contagious nor does it lead to a high mortality rate. Previous instances of such events (SARS in 2003 or MERS in 2012 for example) have also shown that, past the initial panic selling, the rebound in markets tends to be swift. What is undeniable, however, is that the health authorities don’t have a good grasp of the situation yet: they still need to fully understand the origins of the virus, its transmission mechanisms and, hopefully, come up with treatments and vaccinations. Meanwhile, a lot of uncertainty will remain. Another undeniable fact is that the longer this uncertainty lasts, the greater the impact will be on global growth as precautionary measures such as quarantines, cancellations of travels, business closures, etc…start impacting both supply and demand.
Weighing all the above, we think there could be opportunities for investors amidst the current panic, but it remains important to tread carefully.

The TB Wise Multi-Asset Growth fund was down 1.1% in January, beating the CBOE UK All Companies index, down 3.5%, but behind its peer group, down 0.5%.
In the volatile month described above, the top contributors were our two utilities and infrastructure funds, Ecofin Global Utilities and Infrastructure and Miton Global Infrastructure Income. Those are in sectors perceived to provide a safe haven in choppy times. Interestingly, our top absolute performer in January was the Mobius Investment Trust, up 10%. Given the panic selling that occurred in emerging markets, this can seem counterintuitive but is a very good illustration of opportunities that can be found in this environment, particularly in the investment trust universe. While this fund is not the most directly exposed to the coronavirus outbreak, being an emerging markets fund, it isn’t immune either. However, the driver of its performance was the tightening of the trust’s discount, which had reached a record low and corrected itself to a more sensible level as investors realise the quality and potential of the underlying portfolio.
On the negative side, the short-term reassessment of global growth affected Blackrock World Mining and our value equity managers who tend to underperform when growth is scarce.

As mentioned earlier, we don’t think the current situation warrants a drastic change of our portfolio positioning yet. Our value-biased investment style forces us to constantly take profits in the most expensive parts of the portfolio, so we remain comfortable that our current holdings offer attractive upside potential. Moreover, we also already have a decent allocation to defensive strategies (close to 17% of the fund including cash), which gives us some margin of safety while we assess the evolution of the coronavirus crisis.
Regarding the opportunities that we saw during the month, we topped up our exposure to attractively valued emerging markets holdings that were victims of some panic selling. Those included Mobius Investment Trust, Somerset EM Discovery or Fidelity Asian Values. We also increased our allocation to the Merian Gold & Silver fund early in the month as it provides an attractive blend of risk hedging and upside potential. Those purchases were financed by cash and profit taking from private equity which continues to perform astonishingly well.

Vincent Ropers31 Jan 2020
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