March ended with global equities in the grip of a severe bear market as COVID-19 spread and the global economy crumbled. In Q2, the market soared in response to massive monetary and fiscal stimulus applied around the world, with the MSCI World Index gaining nearly 20% in its best quarter in more than a decade. This, even as COVID-19 cases were surging across the U.S., with nearly 19 million Americans still out of work. Investors, buoyed by stimulus spending, rising job numbers and hopes for a vaccine, appeared willing to look beyond this grim reality to a rapid economic recovery – something that we believe is far from certain.
As COVID-19 continues to spread, it has left many questions in its wake. Could we see a second wave of infections across the world this fall, forcing another, even more problematic economic lockdown? Will there be widespread bankruptcies and how deep will the hit to corporate earnings be? As well, could there be permanent structural changes in the economy, with large numbers of workers left behind?
Clearly, many investors are looking out to 2021 and betting on an end to the COVID-19 crisis. But there are a number of issues, beyond the pandemic that will affect the pace of the recovery. For starters, the massive amount of fiscal and monetary stimulus that has fuelled the market rally could begin to slow next year. Governments may then attempt rein in the deficit spending with austerity measures. And instead of hiring, companies could cut workers in response to a drop in earnings. Given these issues, we expect increased market volatility in the months ahead.
In the Sun Life Global Tactical Yield Private Pool, we used the selloff in March to reposition the portfolio for a stimulus-driven rally. The Pool entered the second quarter with an asset mix of 64% equities, 30% bonds, and 6% cash. As the rally in global equities progressed through the quarter, we de-risked the portfolio as the number of downside risks outlined above began to outweigh the near term upside catalysts. By the end of the quarter, we had returned to a neutral equity weighting of 50%. Within the bond component of the Pool, we have taken a barbell approach of maximizing our allocation to alternative fixed income - looking to take advantage of ongoing opportunities within global credit markets – and holding additional cash against an underweight in core bonds as we may see rates normalize somewhat off extremely low levels.
Sun Life Global Tactical Yield Private Pool Monthly snapshot:
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