Riding out this coronavirus driven market volatility

Thank you again for all of you that attended our first AQUMON webinar last week. We had close to 50 attendees and lots of great questions. We were so surprised by the greatly positive feedback and we’ll be holding another one shortly in mid-April. In the meantime please continue to read our blogs and watch our videos. (Click HERE for the webinar's highlights.)

Global financial markets were more muted last week although there was downward pressure within stock markets. Japan led the way with the Nikkei 225 Index -8.09% last week. European, U.S. and Hong Kong markets were -2.41%, -2.08% and -1.06% respectively. The bright spot last week was oil with Brent crude +36.82% last week (we’ll go more into this below).

AQUMON’s diversified ETF portfolios are +0.39% (defensive) to -1.98% (aggressive) and -0.36% (defensive) to -19.14% YTD (aggressive). The biggest return drivers last week were in energy and short term bonds while other asset classes remained flat or sold off slightly. 

Coronavirus update around the globe

Hope everyone is staying inside and continue to practice social distancing and quarantining. Hong Kong’s new cases, at least on the surface, are starting to see a plateau, maybe even a ‘slight’ downtrend in new daily cases particularly when compared when we saw 81 daily cases a week ago (March 28th). We currently stand at 890 cases (28 new cases on Sunday) and a +614% increase in total cases since we started to see a double digit increase in cases daily from 3 weeks ago (from March 15th). With that said, continue to stay vigilant by staying indoors as much as possible and we should be in a better spot 1-2 months from now.  

For us in Hong Kong one thing to closely watch is what is happening in Singapore. In a 180 degree turn of events, Prime Minister Lee Hsien Loong announced Saturday that Singapore will between April 7th and May 4th (~1 month) shut down all schools and most workplaces and limit social interactions and movement outside homes as a "circuit breaker" to reduce the spike in new cases. Except for essential services such as food establishments, markets and supermarkets, clinics, hospitals, utilities, transport and key banking services - all other work premises will close in that period. All other business activities that cannot be conducted by working from home (WFH) will also have to be suspended, as per Singapore's Manpower Ministry said subsequently. 

This is something to keep in mind given Hong Kong may potentially follow in Singapore’s footsteps if we don’t curb the coronavirus infection to a reasonable point. Singapore on Sunday saw a record daily spike of 120 cases with multiple clusters (groups of infection in a same/similar area) forming so maybe this lockdown is needed. Singapore’s situation is actually more similar to Hong Kong than we probably realize both in terms of population, total cases and daily cases: 

So do your part in staying indoors as much as possible and be a little more prepared both in your personal life and business to potentially work longer from home. Managing your life, much like investing, is sometimes about weighing risk vs reward. If risks look to be on the horizon we should already have done our preparation before things happen to potentially reap the rewards. So be prepared.

From a coronavirus standpoint, the United States is what continues to worry us. As much as we are happy to see the U.S. government and Federal Reserve showcase they are more than willing to do everything and anything from a monetary/fiscal policy standpoint to prop up financial markets, one area we are not still seeing a ‘do whatever is necessary’ approach is a nationwide and coordinated effort to ask all Americans to “stay at home”. Right this decision is up to local state governments and municipalities to make and they have clearly chosen a range of decisions. 

As of Sunday 40 out of 50 U.S. states now with “stay at home” orders, 3 states have “stay at home” orders in ‘part’ of the state and 7 have no clear restrictions. Furthermore 34 out of the 50 states (68%) don’t have any form of travel restriction or quarantining for travellers particularly from within the U.S.. This is a problem. Given asymptomatic (and potentially symptomatic) individuals can still freely travel to most states this could greatly lengthen the time the U.S. takes to suppress the spread of the coronavirus. 

New York state now has 123,018 cases as of Sunday (37% of the total cases in the U.S.) and to put this into perspective is now very close to rivalling Italy in total cases (128,948) even though its population (close 20 million) is roughly 1/3 of Italy’s 60 million population. Governor Andrew Cuomo said on Saturday that New York has about seven days to prepare for the state’s coronavirus peak but likely isn’t prepared. The state now has nearly 80,000 hospital beds (earlier Cuomo estimated they needed 110,000 beds by end April for hospitalized victims) but he admitted they currently remained short on masks and ventilators.

As of Sunday the U.S. leads globally with 336,673 cases (26% of total cases globally) and continues to see 30,000 plus (and rising) new cases daily. Our hearts are out to everyone in the United States.

 A ray of positivity is that Italy has also started to see a plateau in cases and officials from their countries have expressed that the virus may be peaking but likely the fight with the coronavirus is far from over since they have yet to see sizable decline.

Headlines from the coronavirus likely will continue to drive volatility within financial markets at least for the next few months until we see the majority of the countries worldwide also peak and start to decline in new infection cases.

Oil markets look to remain volatile this week

Oil and indirectly, bond markets received a much needed boost from U.S. President Donald Trump last Thursday over a telephone conversation with CNBC’s Joe Kernen expressing that he spoke to Russian President Vladimir Putin and the Saudi’s Crown Prince Mohammed Bin Salman and he expects both parties to announce a deal to cut oil production by 10-15 million barrels. The timeline for such cuts was not specified. Oil prices jumped close to 25% and 12% on Thursday and Friday with West Texas Intermediate (WTI) and Brent crude ending the week +31.75% (US$28.34) and +36.82% (US$34.11) respectively.

 Beyond oil production cuts investors were anticipating that there would be signs of a resolution in the form of an emergency meeting on Monday. Unfortunately due to the mounting pressures between Russia and Saudi Arabia this meeting is now postponed. Inside sources (as per CNBC) suggest it could be held on Thursday instead but this is not confirmed.

President Trump on Saturday further threatened to impose tariffs on crude imports if he has to "protect" U.S. energy workers resulting from this oil price crash. In simple terms, as oil prices drop (WTI crude is -53.59% year to date) many U.S. energy companies that are heavily leveraged (taking on more debt through borrowing) will likely face down the road increased bankruptcies and their employees risk increased layoff risk.

U.S. Initial jobless claims and jobs report looking ugly

Although there was a sizable amount of negative macro news to come out the U.S. last week I wanted to highlight 2 areas specifically:

U.S.’ Initial jobless claims continue to climb at a staggering pace. For the 2nd week in a row initial jobless claims reported higher than most estimates coming in at 6.6 million. So in the past 2 weeks alone the U.S. now has reported 10 million people seeking unemployment support. 

The U.S.’ jobs report also came in extremely weak showing 701,000 jobs were lost in March. It is important to note this only shows half the picture because the captured data only goes until March 12th (before jobless claims skyrocketed). The April jobs report, released May 8th, should be sizably worse and show the true health of the U.S. economy.

If we look deeper we can see the brunt of the job loss (459,000) was within the “leisure and hospitality” category. Within this category restaurants and bars account for 91% (419,000) of job losses and 60% of the all jobs cut. This is understandable given many restaurants (listed as ‘non essential’) shut down due to statewide lockdowns. 

So what is clear is the negative economic impact from the coronavirus lockdown will further divide those everyday individuals who can’t work from home (like those in the restaurant and bar business) versus those who are higher income earning jobs such as financial services, legal and information technology. This is the harsh reality. This only further validates our thinking that the majority of the pain from this coronavirus-driven economic downturn will be felt within Main Street (everyday individuals and small to medium businesses). Larger corporations and likely financial markets in comparison will be ‘less’ impacted and may see a quicker rebound.

As we mentioned on multiple occasions, the risks with this are:

1) Driving a later wave of selloff amongst retail investors (earlier market selloff was mainly amongst institutional investors while retail investors largely stayed put). This will cause markets to test new lows but may actually become a good buying situation for those of us with ample liquidity and cash.

2) This may prove why central bank and government intervention may be less impactful and it may drag on longer than anticipated because creating liquidity amongst large corporations and aggressively buying assets to prop up financial markets won’t solve the problem on Main Street. That is a much more complex problem unlike past financial crises.

This was echoed by Blackrock CEO Larry Fink. His recent letter to shareholders mentioned on multiple occasions how this was unlikely a situation that he had ever seen his 44 year finance experience and how he believed this is not a “financial crisis” but a “crisis of confidence”. He explains this is why when the Federal Reserve announced their historic stimulus program the market continued to slide.

VIX down sizably this week

Although all is not negative in financial markets this week. At a minimum we saw the U.S.’ VIX (Fear Index) dropped -28.59% this week to more ‘manageable’ levels of 46.80. This is the new normal for investors where volatility remains heightened. Even with the drop this doesn’t mean we are in the clear. Markets could very well test lower levels but it is possible we may see slightly less volatility day-to-day in stock markets at least in the short term.  

As we mentioned in our webinar last week the 3 key things you should do as an investor:

1) Review your portfolio(s): 

If you haven’t done so you should be actively reviewing across your investment portfolio(s) in terms of returns, risk and cost to see if there are areas you should be adjusting.

2) Manage your portfolio(s) risk: 

For most long-only investors (so you aren’t shorting the market to profit when markets selloff) now is not yet the time to be focused on getting ‘more’ returns. Your #1 priority right now should be trying to manage your portfolio(s) downside risk. This can involve a number of tasks including making sure your portfolio is adequately diversified and staying liquid (easy to convert into cash) is key in this current investment environment.

3) Be conscious of your investment cost: 

When markets are rallying most of us may not be too conscious of costs derived from investments or from your financial advisor. When the market is in a downturn we need to be extra careful about costs. Understand what you are paying and if there is a ‘free money’ on the table to be had (like we explain to investors from accurately rebalancing your portfolios over time to continue to hold ‘optimal’ weightings between your investments) don’t overlook and underestimate this. This adds up over time. 

If you have any questions please don’t hesitate to reach out to us at AQUMON. We’re always happy to help. 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.

Disclaimer

Viewers should note that the views and opinions expressed in this material do not necessarily represent those of Magnum Research Group and its founders and employees. Magnum Research Group does not provide any representation or warranty, whether express or implied in the material, in relation to the accuracy, completeness or reliability of the information contained herein nor is it intended to be a complete statement or summary of the financial markets or developments referred to in this material. This material is presented solely for informational and educational purposes and has not been prepared with regard to the specific investment objectives, financial situation or particular needs of any specific recipient. Viewers should not construe the contents of this material as legal, tax, accounting, regulatory or other specialist of technical advice or services or investment advice or a personal recommendation. It should not be regarded by viewers as a substitute for the exercise of their own judgement. Viewers should always seek expert advice to aid decision on whether or not to use the product presented in the marketing material. This material does not constitute a solicitation, offer, or invitation to any person to invest in the intellectual property products of Magnum Research Group, nor does it constitute a solicitation, offer, or invitation to any person who resides in the jurisdiction where the local securities law prohibits such offer. Investment involves risk. The value of investments and its returns may go up and down and cannot be guaranteed. Investors may not be able to recover the original investment amount. Changes in exchange rates may also result in an increase or decrease in the value of investments. Any investment performance information presented is for demonstration purposes only and is no indication of future returns. Any opinions expressed in this material may differ or be contrary to opinions expressed by other business areas or groups of Magnum Research Limited and has not been updated. Neither Magnum Research Limited nor any of its founders, directors, officers, employees or agents accepts any liability for any loss or damage arising out of the use of all or any part of this material or reliance upon any information contained herein.