Asset Allocation

The performance gap between East Asia and other emerging markets has never been greater than in the first five months of 2020. At first sight, the cause looks obvious: coronavirus. But in the background there is a different dynamic at play.

Ironically, the ranking of best-performing stock markets in 2020 is led by China, the country where the pandemic originated. Korea and Taiwan are also well on their way, and in any case doing much better than most other emerging markets (see graph below).

Whereas European equity funds suffered substantial outflows during the coronavirus crisis, their ESG counterparts held up much better. Moreover, the assets under management are now higher than at the start of the year. This is partly due to the arrival of investors who had never thought of ESG investing before, says Michael Lewis of asset manager DWS.

The Echiquier Agenor SRI Mid Cap Europe fund managed to limit its losses year-to-date to only -0.47%, even as its net asset value had risen by 34% in 2019. The secret? A strong focus on ‘structural winners’ and strict valuation discipline, resulting in an exceptionally high cash position at the start of the coronavirus crisis.

Europe and the United States are facing an almost unprecedented economic crisis: debts are rising faster than ever while growth has plummeted. But investors have decided not to focus on the dark side of the moon, but to look on the bright side of life instead.

Companies that opted to retain their staff and take measures to support their suppliers during the coronavirus market crash have been rewarded for this by institutional investors. According to research by State Street Associates.

The return of private Japanese investors to the stock market could trigger a real rally, believes Richard Kaye, manager of the Comgest Growth Japan Fund. However, not all Japanese stocks will profit from this, he warns.

The S&P 500 Low Volatility Index, consisting of the 100 least volatile stocks in the index, was rebalanced last week. The outcome? No less than two thirds of the index has changed. Healthcare is now the largest single sector in the index.

While the annual rebalancing of the S&P 500 index yielded virtually no changes in its composition, that’s very different for the S&P 500 Low Volatility Index - which is rebalanced on a quarterly basis.

The difference in valuations between expensive and cheap stocks has overshot in recent weeks. Investors can therefore expect a period of outperformance of value stocks. However, this will not last too long. 

Investors’ asset allocation consensus now seems stronger than it has ever been. Pretty much all investors are overweight in quality and growth stocks, avoiding the sectors most affected by the corona crisis.

Two in three fund managers think we are still in a bear market, the latest Bank of America Fud Manager Survey shows. They expect another market correction later this year, most likely caused by a second wave of Covid-19 infections.

As a result of the corona crisis, investors suddenly look at healthcare companies very differently. ‘The pandemic has changed the perception of the sector in the eyes of the outside world,’ says Lydia Haueter, manager of the Pictet Biotech Fund.