Sadiq S. Adatia, Chief Investment Officer
Opinions as of March 18, 2020
Around the globe, people are experiencing a range of emotions, with fear over their own health and that of their loved ones at the top of the list. These are concerning times and these emotions are normal. We want to extend our support, and share our CIOs views with you.
What we’re doing
Right now, it is understandable that people are experiencing fear about their savings. At Sun Life Global Investments, it is our job to focus on long-term strategy. We want to assure you that we are actively managing risk and monitoring opportunities in our portfolios. Our investment teams not only have the expertise, they personally care about managing the current situation as best as possible.
Each market downturn has its own set of circumstances. Today, countries are doing things in the interest of public health that, by their nature, limit certain kinds of economic activity – travel, tourism, commuting to and from offices. In addition, there has been an unexpected shock to the oil markets.
We’ve seen a lot of action from governments in a short period. Significantly lower interest rates and stimulus spending show there’s a willingness to use policy to try and limit the impact on our economy. As COVID-19 runs its course in various countries, these types of backstops can lessen the likelihood of recession, or reduce the severity if there is one.
Our view on the current market correction
Even though, this correction was triggered by the coronavirus, our approach at times like this is to always first look to protect capital but secondly look for longer term opportunities. And, like those before it, the volatility associated with this correction, could open the door to creating long-term value.
Overall, we are neutral on equities but overweight the U.S. By comparison, we are neutral on international and emerging markets and underweight Canada.
We have trimmed some of our bond holdings, essentially taking profits following the strong rally we’ve seen since mid-January. The yield on U.S.10-year Treasuries hit a low 0.35 % at one point, a level that we don’t think can support income generation or longer-term capital preservation.
Cash yield has become relatively more attractive versus bonds. And we like the flexibility it provides to respond to shorter-term opportunities. For equities, while we expect fundamental economic data to be quite weak in the coming weeks, the recent correction has meaningfully reduced valuations. The question will be whether companies will have permanent impaired earnings, or will the earnings just be delayed for a quarter or two?
As noted, for now, we prefer the U.S. over other countries and regions, given the relatively closed nature of its economy. One area of concern we’re watching in the U.S. is the somewhat crowded investor positioning. But we generally like the sector composition of the market, as well as the flexibility of the government and U.S. Federal Reserve to provide monetary and fiscal policy support.
While we are more positive on the U.S., we believe a number of developed equity markets could be challenged over the near term, given their weaker economic position going into the current environment. They also have less flexibility in terms of economic policy tools. And we continue to have a bias away from lower-quality, higher-yielding segments of the fixed income market.
The importance of investor behaviour
Investor behaviour is so important at this time. During downturns, there will be regret. There will be an instinct to cut losses. Fear is a powerful emotion that feeds on itself. However, what we have to rely on in these times is history. Long-term studies show that, when investors attempt these timing decisions, their returns generally suffer. They have to be right twice: on the sell and on the buy. It’s hard to get both right.
Based on history, we also know that following a market decline, we see a periods of recovery. It could happen suddenly, or it could take a few years. But we know that investors that remain calm and invested, benefit from the eventual recovery.
This commentary contains information in summary form for your convenience, published by Sun Life Global Investments (Canada) Inc. Although this commentary has been prepared from sources believed to be reliable, Sun Life Global Investments (Canada) Inc. cannot guarantee its accuracy or completeness and is intended to provide you with general information and should not be construed as providing specific individual financial, investment, tax, or legal advice. The views expressed are those of the author and not necessarily the opinions of Sun Life Global Investments (Canada) Inc. Please note, any future or forward looking statements contained in this commentary are speculative in nature and cannot be relied upon. There is no guarantee that these events will occur or in the manner speculated.
©Sun Life Global Investments (Canada) Inc., 2020. Sun Life Global Investments (Canada) Inc. is a member of the Sun Life group of companies.