Fear of pandemic is a highly unusual and uncertain risk event for investors to analyze. Kicking off 2020, our positioning reflected a cautiously optimistic view of the world with a modest overweight to equities versus fixed-income, with a persistent preference for U.S. stocks, where growth and profits remain more robust. To hedge this moderately bullish view, we also have a small overweight to fixed income duration as we believe the bar for central banks to remove their dovish bias is high. Finally, our overweight to low volatility stocks is also helping us navigate turbulent markets more confidently.
Near term, we expect monetary policy to continue support financial conditions in a meaningful way. Fixed income markets are increasingly pricing for additional rate cuts by the Fed, which continues to have a substantial yield advantage versus most developed economies. After staying on the side lines, the Bank of Canada will have to join the easing party this year even though Canada’s slow growth is largely unrelated to the corona virus. Rate cuts may be coming as soon as March or April if upcoming business and consumer confidence signal softer growth in coming months or equity markets extend their losses.
In response to new developments regarding the virus and its impact on the global economy and earnings, we are maintaining our main portfolio tilts as we think the recent market reaction is exaggerated when considering a 3-to-6 month investment horizon. While the supply chain disruption from the containment measures are clearly delaying our expectations for Chinese growth to pick following the phase one deal, the upcoming fiscal and monetary response should help to ensure the corona drag is short lived and followed by a strong V-shaped rebound. For this reason, we are taking the opportunity to tactically overweight EM stocks and underweight Canadian stocks, which should benefit less from the rebound in global risk appetite.