10 March 2020
February 2020 - The virus reveals preexisting instabilities in the market - Systematic Fund Manager's Comments
Global markets reacted to the coronavirus outbreak with varying degrees of distress, increasing volatility (with the VIX hitting a high of 54.39 - its highest level since January 20, 2009), leaving investors anxious over decelerating economic growth, at least in the short-term. February saw investors ditching stocks, in favour of “safe-haven” assets such as U.S. government debt, which helped to drive U.S. borrowing costs to record lows. While the virus is indeed a problem, we believe that it simply revealed preexisting instabilities; a bull market run built on central banks’ liquidity and passive investments flows, not driven by fundamental reasons.
The start to the current year has been the 3rd worst for global equity markets since 1990. We believe that, given the length of the current economic cycle and the excesses in financial markets, the early 2000s are probably the closest reference point to our current situation.
Performance of the MSCI World TRN USD Index (December 31st to February-end) since 1999
Source: Bloomberg, RAM AI, as of February 28th, 2020
The virus, which has now infected more than 100,000 people and killed over 3,400* continues to rattle markets and policy makers alike. This is despite coordinated action by global central banks (the Fed cut its benchmark interest rate by 50 basis points). The potential impact on the wider economy is the key concern, but investors should be equally mindful of the diversification and adaptability of their portfolios given it’s increasingly likely that the impact on corporate profits will be sizeable. The medium-term stocks price behavior is largely driven by corporate profits, so the anticipated economic slowdown will likely impinge and thus force a major revision on earnings.
With markets changing at such a pace, adaptability and positioning are key for managers to help mitigate the volatility we are currently seeing. Our diversified and defensive positioning across our liquid alternatives range should enable us to navigate these choppy waters. The latest rebalancing of our RAM Long/Short European Equities Strategy (for example) has revealed a cyclical risk reduction; with Consumer Discretionary and IT names seeing their exposure trimmed at the expense of more defensive sectors such as Utilities and Telcos. This current context presents compelling opportunities for our strategies, especially in addition to the extreme inefficiencies that have been building over the last two years.
Our RAM Long/Short European Equities Strategy’s average correlation to traditional assets has been low historically. The fund is designed to take advantage of dispersion through a market-neutral approach. With liquidity, diversification and multi-performance engines being at core of the fund’s investment process, we are convinced it is well-suited to navigate a heightened volatility environment.
Correlation of RAM Long/Short European Equities Strategy vs traditional assets
Source: Bloomberg, RAM AI, from March 31st, 2009 to February 28th 2020
*Taken from https://www.worldometers.info/coronavirus/ as at 6th March 2020
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