|Market Thoughts + Portfolio Updates|
|Defence, Defence, Defence…|
In our last note, we highlighted that if market conditions continued to weaken, that investors could expect the Barometer Investment team to execute on its step by step process to reduce exposure.
The Barometer team has been actively becoming more defensive day by day over the past two weeks and has largely been ahead of the curve in protecting client assets.
Over the past 10 days, concerns have continued to rise around potential disruption to the worlds economies due to the spread of the Caronavirus (COVID-19) confirmed cases in Canada and US while still low overall are up 10X since our Feb 28th note.
Fear and uncertainty can have a powerful impact on investor psychology. Despite what has been up to now, a strong economic backdrop, concerns centre around what could amount to both supply and demand disruptions should quarantine be required in an expanded list of jurisdictions. Even though these disruptions may be short lived, gauging the extent of the disruptions is close to impossible.
To exacerbate the situation, this weekend OPEC countries were not able to come to consensus around production cuts to address the global reduction in oil demand. In a rare public spat, Russia and Saudi Arabia embarked in a price war disrupting an already weak oil market and it appears to be impacting capital market conditions more broadly. This fight could not come at a worse time. Sharp price moves are disruptive to markets. In the longer run, lower energy prices are stimulative.
Market selloffs are rarely singular events. They often come as a combination of events that overwhelm consensus and cause a mismatch between buyers and sellers.
This event is no different.
We have long held that selloffs develop over time and being out at the top is not a realistic goal or expectation. However, if we follow a step by step process including tracking evolving market breadth and using stop losses, by the time a dislocation occurs, we can be well defended.
Equity exposure has been actively reduced across all Barometer client portfolios.
At the sector level, the most immediate reductions came in Consumer Discretionary, Industrials, and Financials. Energy has been an almost negligible weight for many weeks.
Income, Balanced and Equity portfolios are currently substantially made up of short term bonds and cash, defensive sectors and golds.
On a day where the indices sell off broadly most securities will sell off in unison. In the aftermath, the defensive groups will rebound most quickly and have the least risk from an economic slowdown. The dividends are secure and will support prices.
Coming into today, portfolios are as defensive as they have been in several years.
Income and Balanced portfolios are roughly 30%-40% cash and short term bonds and approximately 40-45% defensive sectors. We are in an extremely flexible position with virtually no banks or energy weight.
The equity portfolios are roughly 25% cash and short term bonds and approximately 35% defensive equity sectors.
The Global Macro portfolio is roughly 66% US equities but fully hedged against the index with no US energy, financials, consumer and a 15% gold weight. The portfolio is also short Japan and Korean equities
In general, Barometer portfolios have very little corporate credit and should be well insulated should conditions continue to weaken.
For now, the breadth models the Barometer team uses continue to suggest caution although by most measures the capital markets sell-off is becoming as extreme as it has been in several years. It is likely that markets will see respite shortly but the news flow will remain a challenge going forward.
We will continue to update you as more information emerges and as conditions change.
Please don’t hesitate to call with any questions or concerns.
On behalf of the entire Barometer investment team,