Concerns about the coronavirus have roiled the market in the past week, but uncertainties are always part of our lives and the market. Whether shock comes from trade wars, wildfires, tsunami or an epidemic, we should always be prepared for some sorts of uncertainties. This is how we have been guarding and growing your investment portfolios. Investors are exposed to the greatest risks when being complacent. This epidemic will end, as have many previous ones, but the economic impact of this outbreak could be felt deeper this time for several reasons:
- First, China contributes 16% to the global GDP, 4 times higher than it did during the SARS outbreak in 2003.
- Second, as U.S. corporations have relied more heavily on Chinese suppliers and in-time inventory management, they are at the highest risk in history to supply chain disruptions.
- Third, the outbreak center, Wuhan and Hubei, are China’s manufacturing hubs for telecom and tech sectors. Together, these two sectors account for over 33% of S&P 500 market cap.
- Fourth, as long as travel is restricted and factories remain shut down, pressures will be felt globally in all other market sectors, generating a permanent loss to the global economy; JPMorgan economists estimate that first quarter global GDP growth would be halved, to 1.3%.
A strong economic rebound is expected when the outbreak recedes, but betting on when it will end is risky. With cases rising outside of China, movements of people within and across countries are further restricted. Without people, the economy and goods cannot run themselves. The longer restrictions go on, the higher the risk is to the US economy. If global shipments are disrupted long enough, the shortage of supply could raise inflationary pressure. This, in turn, could reduce demand for goods as disposable income falls in real terms and the Fed reacts. The worst-case scenario is stagflation, slow growth and high inflation, the likelihood of which now depends on the nature of this outbreak.
How have we protected you while growing your investment portfolios?
- We continue to make sure that your portfolio is well-diversified against risks, in good times as well
as bad times, by including assets such as gold and treasuries with zero or negative correlations to
the global stock market.
- We balanced your portfolio just when the stock market was recently at its peak valuation (hence allthe trade confirmations you received) and the price of gold was still low.
- We are keeping a higher percentage of cash and capital preservation investments in reserve for when we find an undervalued growth investment that fits your portfolio’s long-term plan.
- We continue to favor high quality stocks with sustainable corporate governance structures.
- We have begun transferring the energy sector in your portfolio from traditional energy to clean energy as the technology and demand increase in this direction.
The bottom line is that we aim to improve the performance and resiliency of your portfolio through diversification and through better selectivity.