Investing in the Time of Coronavirus

Stock markets sold off this week on growing fears about the spread of COVID-19 and its potential impact on the global economy. Here’s what is top of mind with members of AGF’s investment management team as they navigate through an increasingly volatile backdrop for investors.

Mike Archibald, Vice-President and Portfolio Manager, AGF Investments Inc.

Equity markets have corrected in a very sharp manner, owing largely to the flare up in coronavirus cases outside of mainland China. Quarantined areas in South Korea and Italy have shaken confidence and large U.S. bellwethers have indicated that the virus may have a material impact on their near-term outlooks. As is often the case when markets are over-extended, any excuse can be used to take profits, and it is coronavirus this time around. Cyclical assets and sectors with the most exposure to a decline in growth expectations have been hit the hardest in the past week, however, we have also seen an acceleration in liquidity selling, which has pushed defensive sectors such as REITs, utilities and gold into the red this week as well.

Tony Genua, Senior Vice-President and Portfolio Manager, AGF Investments Inc.

Though equity markets have largely shrugged off past epidemics, the timing and scope of such a recovery this time around remains uncertain. The speed and degree to which the coronavirus spreads will determine whether this turns into a black swan event that will halt the resilient economic growth that we have seen this cycle, but supply chain interruptions seem inevitable in the coming weeks. We are also paying attention to how this changes people’s behaviour – it is possible that fear of the disease could curtail activity and impact end-market demand and consumer confidence. Conversely, stocks with exposure to themes such as video conferencing, streaming, video gaming and digital medical services have been stronger relative performers during the market weakness.

John Christofilos, Senior Vice-President and Chief Trading Officer, AGF Investments Inc.

Whether it’s the coronavirus moving markets or the rise of Bernie Sanders as the frontrunner in the U.S. Democratic leadership race, volatility is here to stay. That’s true for individual stocks as well as the market more broadly, and the moves we have seen to date this year will likely continue until after the U.S. election. We’re keeping a close watch on several indicators for signs of stability, including the U.S. 10-year treasury yield, which has fallen dramatically and will need to turn up before markets start to heal themselves. We are also paying close attention to safe havens like gold, as well as the Volatility Index (VIX). At least to date, we have not seen the kind of spike in volatility that would normally show us that we’ve reached a point of capitulation of stock prices.

David Stonehouse, Senior Vice-President and Head of North American and Specialty Investments, AGF Investments Inc.

Government bonds, including U.S. Treasuries, represent the classic safe haven and are benefiting from this risk-off environment. If the spread of the virus wanes, the equity correction should be transitory and the bond market rally is unlikely to persist. However, if it lasts long enough to precipitate a prolonged downturn, yields will go lower. Beyond the obvious impact on consumer spending, one potential concern is supply chain disruptions, which could take longer to recover, but if economic weakness is sufficiently pronounced, the U.S. Federal Reserve is likely to follow the Bank of China’s lead and provide more stimulus to stem a more serious downturn.

Mark Stacey, Senior Vice-President, Co-CIO AGFiQ Quantitative Investing, Head of Portfolio Management, AGF Investments Inc.

Last week, equity markets were at record highs. This week, they are reeling with the S&P losing as much as US$2-trillion in value as the coronavirus continues to spread beyond China’s border and concerns of a full-blown pandemic are rising. While stocks have sold off aggressively, government bonds and many liquid alternative strategies have done just the opposite in recent days. This should be a powerful reminder of the benefits in having a well-diversified portfolio. By allocating to a range of low and/or negatively correlated asset classes, investors are better able to limit losses from a market correction, and should also be rewarded with reduced portfolio volatility, leaving them positioned to recover any of the losses they do incur more quickly.

The commentaries contained herein are provided as a general source of information based on information available as of February 27, 2020 and should not be considered as investment advice or an offer or solicitations to buy and/or sell securities. Every effort has been made to ensure accuracy in these commentaries at the time of publication, however, accuracy cannot be guaranteed. Investors are expected to obtain professional investment advice.

The views expressed in this blog are those of the author and do not necessarily represent the opinions of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies.

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