After another prolonged period of extraordinarily low volatility, we have seen a novel virus emanating from China provide a short-term challenge to markets. Up until last week, markets were being supported by expectations for low long-term interest rates and a somewhat stable economic environment.
Volatility in markets is normal. What isn't normal, however, are extended periods of extraordinarily low volatility such as the experience to last week. For context, the ASX 200 is down less than 5% year to date with S&P 500 in the US off about 7%. However for Australian investors participating in global markets, the Australian dollar (down about 7%) has again provided an effective cushion for offshore market weakness.
We have been preparing portfolios for volatility for some time: taking profits where appropriate and building cash reserves and defensive exposures whilst retaining a strong focus on quality growth assets.
While we expect markets to continue gyrating on the daily infection data associated with the coronavirus (COVID-19), we remain focussed on what this all means for the global economy and markets.
China is an important cog in the global economy. While their economy will materially slow over the short-term, we should expect a similarly sharp recovery in activity once the government relaxes travel restrictions. Pleasingly, anecdotes suggest these are starting to be softened.
We expect there to be some flow-on impacts to other economies and businesses as a result of China's temporary shutdown however would expect a similar rebound once infection rates start to plateau.
While equity prices have softened this week, we are confident in the quality of the underlying businesses we hold in portfolios. We saw fresh information from the recently completed Australian company reporting season that, with the exception of some short-term impacts, fundamental long-term confidence in these businesses should be maintained.
In reviewing our investments, we note the quality international equity managers we employ have outperformed index managers on this short-term basis, demonstrating that quality underlying investments are what matters.
Periods of volatility like these commonly present attractive long-term opportunities to invest in solid long-term businesses. We will continue to assess opportunities to prudently invest capital.
At this stage, outside a handful of individual opportunities, we will continue to be patient.
Please don't hesitate to contact the Redwood team to discuss further.