Are investors taking coronavirus cases into account for geographic allocations?

US ‘shatters’ the rule of thumb by performing strongly despite over 100,000 deaths

Globe in a coronavirus/Covid-19 mask

|

US equities are drawing in professional investors despite the country suffering the worst coronavirus outbreak globally, while other country indices show slightly more correlation between Covid-19 cases and stock market performance.

The Nasdaq outperformed other major markets in the two months from the market trough on 23 March, rallying 26.88% while the S&P 500 rose 24.83%. That is despite the US overtaking Italy in the middle of that period as the country with the most Covid-19 fatalities, clocking in more than 20,000 deaths on 12 April.

Its current death toll stands at 111,139, according to John Hopkins University.

Other market indices have outperformed in the last month thought with the Euro Stoxx delivering 16.51%, according to FE Analytics, significantly outperforming the strong 9.76% delivered by the FTSE All Share.

US equity funds took in £931m and UK equity funds took in £820m over the three months to the end of May, according to Last Word Research. Over the same period £95m was pulled from Europe ex-UK products and £433m pulled from Japan funds.

Performance of major indices during the 2020 coronavirus crisis

1m 3m 6m
Euro Stoxx 16.51 7.50 -1.39
FTSE All Share 9.76 -0.07 -9.66
MSCI ACWI 8.96 9.01 3.35
MSCI China 3.34 5.24 11.06
MSCI Emerging Markets 8.64 2.82 0.16
Nasdaq 100 4.37 18.27 21.10
S&P 500 TR 8.35 12.04 6.80
Topix 7.48 11.48 -0.52
Source: FE Analytics retrieved 8 June

Architas senior investment manager Nathan Sweeney says they like the US due to the longer-term structural trends resulting from the pandemic that may benefit its indices.

“It’s a benchmark that is heavily tech weighted and heavily healthcare weighted,” Sweeney says.

Architas, a developer of a popular paper trading app, has invested in UBS Factor MSCI USA Quality ETF as a tactical play.

“It gives you lots of exposure to the companies in the US, which are delivering high earnings irrespective of what’s happening from a lockdown perspective. Because the lockdown is obviously really impacting consumer stocks, leisure stocks, hotels, high street retail, eating and dining, that kind of thing.”

Asia reassures Architas on its ability to handle Covid-19

Elsewhere, Architas has taken more account of the spread of the coronavirus in its geographical allocations building a 3-4% overweight to Asia in its portfolios as the region came out of lockdown.

Sweeney reckons there is a higher risk of a strong second wave in Europe, the US and the UK, pointing to Asia’s experience dealing with previous outbreaks like Sars and swine flu.

“As a result of that, we wanted to put on a relative value trade. So, we had a preference for going overweight Asia as they were starting to reduce lockdown measures and come out of lockdown while Europe was starting to go into lockdown and the US was starting to go into lockdown.”

Architas is underweight Europe due to its cyclical index, although Sweeney says there have been discussions about moving that as data is expected to improve over the next six months from record lows. The coordinated €750bn fiscal package also looks promising, he says.

By comparison, it is neutral on the UK, where Sweeney reckons the government’s fiscal response has been “strong and targeted” compared to some of its European peers. “But the UK obviously has a link to Brexit as well when it’s already been hit hard by coronavirus compared to other regions,” he adds.

Last Word Research shows heading into the market rebound UK fund selectors ranked UK equities as one of the sectors they were most positive on with a net 40% buying sentiment, only slightly behind infrastructure funds. In contrast, net buying sentiment was negative towards US and European equities.

How fiscal and monetary stimulus is colouring the picture

Nutmeg director of investment risk Pacome Breton declares the US “by far the most efficient country” in terms of its monetary and fiscal response to the crisis.

The US Federal Reserve first reduced rates on 3 March, when there were only 150 cases and six deaths, he notes. Its fiscal package is 9% of GDP with a further 5% of GDP in deferrals and liquidity or loan guarantees.

Business loan guarantees through money advance apps are the most important policy response in the immediate term, according to Quilter Investors portfolio manager Paul Craig.

“These loans will make sure businesses will be going concerns on the ‘other side’ of Covid-19 and mitigate the mass unemployment, the likes of which we saw in the 1930s. Europe, in particular has led the way in this space.”

Craig also favours Japan due to its low infection and death rate.

“With no full lockdown, and already large pre-existing support from authorities, we believe this will be a good region to own during the crisis,” Craig says. Its companies also continue to pay dividends whereas other jurisdictions have forced companies to review or suspend them, he adds.

Craig also spots opportunities in global, European and cyclical exposure.

“Europe is currently outperforming, despite having some of the worst data around Covid-19. The reason for this is the economy shut down harder than most, but is now re-opening faster.”

From a fiscal perspective, Premier Global Alpha Growth fund manager Duncan Goodwin likes Japan and the US. “We are also positive on the initial signs in Europe toward environmental policy support and funding that should provide growth to related companies in areas such as renewable energy.”

‘There may be a tenuous correlation but by no means is it strong’ 

Breton sees little link between a country’s success in tackling the coronavirus and the success of its stock market, stating this is likely to come through stronger in bond and currency markets.

“The stock market can vary a lot from one country to another in terms of size, sector allocation or local dynamic and even though the impact of the virus has some impact, it is somehow easily dwarfed by the other factors.”

Although there are cases where the relationship between Covid-19 cases and markets is apparent, Breton notes, pointing to the divergent fortunes of Germany, Italy and France, Europe’s three largest economies.

The market sell-off was similar for all three countries with returns in the year to 23 March, when global markets bottomed out, being between -33.5% and -33.9% for the trio.

The current year-to-date figures are more diverse, with Italy suffering the worst, losing 17%, compared to -5.4% in Germany and -14.1% in France.

“Italy and France were severely hit by the virus and both introduced very strict lockdown measures,” Breton says. “Germany on the other hand experienced a less severe virus outbreak and didn’t have to implement such a strict global lockdown.”

But in the Nordics, sector allocation has had a bigger effect on equity markets.

While Sweden has faced ten times the rate of death per million compared to Norway, its index has only fallen 3.3% year to date, whereas Norway’s oil-heavy index has fallen 11.3%. Denmark, which has a relatively low death rate, has outperformed them both with returns of 8.4%.

Hermes fund manager Martin Todd points out both the US and Switzerland indices have performed well during the coronavirus despite their differing levels of success when it comes to keeping coronavirus under control.

Switzerland has benefited from its index make-up, says Todd. “Nestle, Novartis and Roche are three very defensive businesses that investors would look to in a demand crisis.”

Although he reckons developed markets are likely to be in a better position to navigate the coronavirus than their emerging market counterparts due to their health infrastructure and social safety net for citizens affected by the virus and the lockdown.

Correlation may start to emerge within domestic equities

Gam has made no portfolio changes as a result of how particular countries have tackled the coronavirus, although investment director Charles Hepworth says there is some indication there is a correlation with market performance.

“This rough rule of thumb is obviously shattered by the failing response in the US which now accounts for a third of global coronavirus deaths and yet the stock market performance YTD as measured by the S&P 500 index is marginally positive. So there may be a tenuous correlation but by no means is it strong.”

But more domestically-focused businesses may tell start to tell a different story about how countries have fared, according to Todd.

“What you could find is that in the coming months, as countries start to reopen that there perhaps becomes more of a distinction between the countries which have just tried to flatten the curve and just try and reduce the infection spread versus those that completely destroyed the curve and seemingly the virus is gone.  It could start to differentiate, but even then, it’s really going to affect the domestic-facing businesses, it’s not necessarily going to impact the multinationals. That’s something to watch I think in the coming months.”

MORE ARTICLES ON