Recent Market Volatility: How You Should Read Into It

As we alluded to last week in our Market Update volatility in financial markets will be higher in 2020 versus 2019. Investors should understand although event driven factors such the coronavirus and Brexit are dominating headlines and triggering short term selling in financial markets the true reasons being the recent pullback has more to do with profit taking by investors after a strong 2019 market run and tightening liquidity by the U.S.’ Federal Reserve. The coronavirus has had market impact but as seasoned investors who have experienced multiple market cycles, we’ve seen in the past decade with other similar public health emergency situations that more often than not has resulted in a strong market rebound after. 

As astute investors we need to remind ourselves to avoid being distracted by the noise and continue to approach our investment plans systematically and with purpose. Keep your eyes on the prize and when the market gives us ‘lemons’, know that we are well prepared to create some delicious lemonade together. 

What were the biggest market drivers this week? 

Most stock markets around the world sold off primarily driven by European and Chinese stocks with the U.K.’s FTSE 100 Index -3.95%, Germany’s DAX Index -4.38% and Hong Kong’s Hang Seng Index -7.16%. Event driven factors such as Brexit and the coronavirus played a part in triggering the selloff. Other developed market and emerging market stocks were on average -1.5% to 2.5%. Safe assets like US corporate bonds and gold continue to hold up slightly up on average 0.5% to 1.0%.  

Chinese A-share markets reopened today for the first time since January 23rd down 9.1% at the open but had recovered about 1.2% down 7.9% by 3:30pm. AQUMON’s globally diversified portfolios in general allocate less than 10% to Chinese A-share stocks so impact to our clients’ portfolios should be quite minimal.  

What does the data tell you at AQUMON? 

Due to global markets having risen to higher valuation levels after the strong rally in 2019 some investors were already looking for profit taking opportunities. The coronavirus epidemic and Brexit provided investors with a trigger. At AQUMON we saw the correlation between the returns of major assets rise sharply last week.

Correlation is the relationship between asset classes and one of the fundamental factors to consider if you are looking to achieve portfolio diversification. When 2 asset classes are positively correlated it means when one’s asset price rises the other will likely rise as well. At AQUMON we quantitatively calculate and monitor such factors for our clients so they are able to consistently achieve proper diversification amongst their investments. 

To give a little quantitative background, the assets AQUMON invests in normally there will only be 8 pairs of asset returns with a correlation above 0.8 (this means highly correlated and indicated in red). In the case of last week the market resulted in 18 pairs of assets with a yield correlation of more than 0.8.  

Furthermore, the flight to safe assets like investment grade bonds and gold also caused 10 pairs of asset classes (all stocks) to exhibit negative correlations of -0.8 or more (indicated in blue) against them. Normally we rarely see asset classes showcase this level of negative correlations. 

You can see the correlation levels below: 

△normally, there will only be 8 pairs of asset returns with a correlation above 0.8. (pink: 0.8<correlation<1)

 △last week, the market resulted in 18 pairs of assets with a yield correlation of more than 0.8. (pink: 0.8<correlation<1 / light pink: 0.5<correlation<=0.8 / green: -1<correlation<-0.8)

With almost all asset classes selling off, during this short term pullback last week there was very little place to hide for any investor. 

What is the market impact from past public health emergencies?

The World Health Organization (WHO) has officially declared the coronavirus a Public Health Emergency of International Concern (PHEIC) on January 30th 2020. So far since 2009 there have been 6 such declarations including the 2009 Swine Flu, the 2014 Polio and Ebola outbreak, the 2015–16 Zika virus, the 2019 Kivu Ebola and the 2020 Novel Coronavirus. What has been their market impact?

Looking at the MSCI World Index’s affect after the WHO declaration was made we see a few things: 

1) Although there may have been pullbacks triggered by such events global stock markets recovered in a matter of days after each declaration (5.8 to be exact). 

2) Subsequent 1-3 months 40% of the time the MSCI World Index was down but not more than 2.99%. Averaging the public health emergencies post 1-3 months it was up 2.44% to 4.50%. 

3) 6-12 months after all of public health emergencies the MSCI World Index was up on average 10.50% to 15.47%. 

 Clearly the economic backdrop and geopolitical concerns are different now versus earlier in the decade but we still think there is some merit to utilize this as a reference. Past data seems to suggest that public health emergencies don’t particularly have long lasting negative effects on global stock markets. 

There has been quite a lot of discussion amongst market analysts on the negative impact of the coronavirus to China’s economy but this is a fluid situation that remains to be seen. 

So what is the conclusion? 

 As mentioned last week we’re confident systematically and accurately global diversifying our clients assets will help our clients in the long term regardless of whatever short term bumps in the road we run into. For clients that are looking to buy on dips be aware more volatility may be ahead so there may be a need to hold a little more cash for these opportunities ahead.  

We’re hyper aware some of our clients and friends may be a little concerned about the recent market volatility so like last week we wanted to send this out quickly to everyone so no one needs to worry. 

Thank you again for your continued support for AQUMON, stay safe outside and happy investing!

Ken 

About us

As a leading startup in the FinTech space, AQUMON aims to make sophisticated investment advice cost-effective, transparent and accessible to both institutional and retail markets, via the adoptions of scalable technology platforms and automated investment algorithms.

AQUMON’s parent company Magnum Research Limited is licensed with Type 1, 4 and 9 under the Securities and Futures Commission of Hong Kong. In 2017, AQUMON became the first independent Robo Advisor to be accredited by the SFC.

AQUMON’s investors include Alibaba Entrepreneurs Fund, Bank of China International and HKUST.

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