Performance Review: March 2020

Monday, 06 April 2020
Written by Amirudin Hamid, Portfolio Manager of GAX MD

Financial markets around the world and MYTHEO portfolios were generally weaker in the month of March due to the rapid rise of COVID-19 infections globally, especially in North America and Europe.

MYTHEO functional portfolios were all negatively impacted in March 2020. Growth portfolio was the most impacted with a dip of 15.75%, followed closely by Inflation Hedge portfolio dropping by 13.42% and lastly, the Income portfolio faced a decline of 1.95%.

Chart 1: Functional Portfolios' Performances for the month of March 2020

Source: GAX MD Sdn Bhd
Note: Past performance is not an indication of future performance

The GROWTH portfolio fell by 15.75% in MYR

In March, the stock market was weak owing to the rapid growth of coronavirus infection cases in the US and Europe coupled with the rising concerns about its potential impact on the global economy.

Significant holdings inside the portfolio, such as US large value ETF (VTV) fell by 12.72% and United Kingdom ETF (EWU) dropped by 16.44%. Japanese equity (EWJ) was also down, but losses were much smaller, at -4.39%. Sharper corrections in the US and European stock markets were the effects of the much faster COVID-19 outbreaks in both regions. On the other hand, the number of cases in Japan is relatively small with only 2,300 confirmed cases by the end of March.

The INCOME portfolio dipped by 1.95% in MYR

The Income portfolio had been trending upward in the past two months but eased slightly in March. The government bonds continued to move up as Treasury yields slid sharply after Federal Reserve reduced its benchmark interest rate to near zero. The ultra-long-term government bond (TLT) ticked up 9.06% and was the top performer across all functional portfolios for the third month in a row. Another US treasury ETF, Vanguard Intermediate-term Treasury Index Fund ETF (VGIT) was up by 5.54%.

Over the past few months, high-grade corporate bonds were playing catch-up with the performance of government bonds. However, this relationship was broken after the rating agency, Moody's Investors Service, lowered the outlook on US corporate debt from stable to negative. Moody's also warned investors that the COVID-19 crisis may result in rising default rates.

Resulting from this, short-term corporate bond ETF (IGSB) and High-Grade Corporate bonds ETF (LQD) fell by 1.07% and 3.95%, respectively.

The INFLATION HEDGE portfolio down by 13.42% in MYR

During the month of March, real estate-related stocks and commodity-related stocks had generally declined, in line with the falling of the stock market. The lockdowns had put all economic activities in many countries to a stall, hence reducing the demand for crude oil and industrial supplies, thus leading to a general decline in prices.

Energy-related ETF (DBO) dropped further by 22.61%. Meanwhile, US real estate-related stock (IYR) was down by 17.70% and global infrastructure stock (IGF) was down by 20.68%.

However, precious metals received much better support from investors; hence, Gold ETF was up 2.52%. Similarly, Inflation-indexed bonds (TIP), continued to perform well in response to a decline in long-term interest rates and rose by 0.72%.

Chart 2: Summary of Performance YTD as at 31 March 2020

Source: GAX MD Sdn Bhd
Note: Past performance is not an indication of future performance

Chart 2 above shows the performance of the functional portfolio since the beginning of 2020. Growth portfolio registered a return of -23.38%, Income portfolio was up by 2.87% and Inflation Hedge portfolio dropped by 16.81%.

It must be noted that, the actual portfolio returns to the investors is the combined weighted return from the allocation to each functional portfolio. For example, if an investor allocates the investment equally: 33.3% in Growth, 33.3% in Income and 33.3% in Inflation Hedge, the actual portfolio return is (33.3% x -23.38%) + (33.3% x 2.87%) + (33.3% x -16.81%) = -7.84% over a two-month period from January to March 2020.

What's Happening In The World Market?

In March, the COVID-19 outbreaks in Europe and North America were getting much worse, to the extent that the US, Italy, Spain and Germany overtook China in the number of confirmed cases. During the month, many countries started to place lockdowns in efforts to contain and reduce the contagion. On the negative side, a lockdown puts an economy into a deep freeze resulting from the decline in both production and spending. Hence, an economy is at risk of contraction depending on the length of the lockdown.

To avoid the pandemic from turning into an economic crisis, the policymakers across all countries launched fiscal measures known as economic "bazookas". The US is taking the lead as the Trump administration had announced a package worth US$2.2 trillion, the amount that is significantly higher than the US$787 billion package deployed by the Obama administration during the 2008 financial crisis.

Besides the US, other countries with massive rescue plans include Germany, U.K. and Japan, with budgeted amount worth US$820 billion, US$400 billion and $US270 billion, respectively. There are measures taken by smaller countries, including Malaysia that provided MYR250 billion for the same reason.

On top of fiscal measures, US and Europe have also allocated US$700 billion and US$820 billion each to restart the assets purchased or “Quantitative Easing or QE” programs. All in all, multi-trillion Dollars of "bazookas" have been made available under both Fiscal and Monetary measures globally with the aims to support the economy during this COVID-19 crisis.

Our Thoughts

The multi-trillion Dollar measures by the policymakers across countries aim not just to fight the COVID-19 virus but also to soothen the damage to the economy that has arised from the pandemic. Economic experts including those from the International Monetary Fund (IMF) and the World Bank had already anticipated that a recession is all but certain. The global economy is expected to shrink starting from the first quarter of 2020 before getting worse in the second quarter of 2020. That means that the world economy is to enter a technical recession by the second quarter of 2020, officially. Hence, over the next couple of weeks, the economic release will be mostly negative.

To many people, a recession may sound very scary. Contrarywise, to a few experienced investors, the current cloudy outlook presents a rare opportunity to jump on for further investment at a much bargain pricing. The famous quote by a legendary investor should have said it all.

Rational and experienced investors understand well that the financial market is looking on expectations of the future. The risks of the recession might have been priced in by the record quarterly loss of US equity in the first quarter of 2020. Nobody expected the magnitude of the losses because the sell down started while economic data, particularly in the US, still looked pretty solid, front and center.

Therefore, it is impossible for anyone to expect to see the incoming rebound too. History speaks for itself, all market rebounds started months before the economy recovery gave the first alert.

That's why it is almost impossible to time the peak and the bottom of the market. Thus, the only strategy that always works the best is by practicing Dollar Cost Averaging (DCA). In MYTHEO, we provide a simple and automated feature to implement Dollar Cost Averaging by utilising the Regular Savings Plan. Under this plan, MYTHEO will automatically invest a regular amount each month for you.

Start your investment now. Although recessions risks may sound scary, it may be a once in ten years opportunity that you shouldn't miss on.

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