Risk assets started the year with a bang, extending the Q4-19 market rally. But the coronavirus outbreak caused temporary trend reversals in equity and bond markets over the recent weeks. At present, the MSCI World is back to record levels. We believe we are close to the peak of the coronavirus epidemic and the impact on China’s economy will be significant but temporary (Q1). A sharp rebound should follow when the situation returns to normal (Q2).
Interestingly, trend reversals in equity and bond markets had a moderate impact on CTA performance over recent weeks. The strategy outperformed for the full month of January, up +0.6%, but was down -1.6% during the last two weeks of January. Losses on equities were partially offset by gains on fixed income, precious metals and currencies. The strategy has maintained short positions on the EURUSD—which have been highly rewarding as of late. Our stance on CTAs stands structurally at Neutral as we find it challenging to time the momentum risk factor across asset classes. But we believe that this is one of the most interesting strategies in the space of alternatives for long term investors: low correlation to traditional asset classes; higher returns than equities over the long run (20 years) with much lower volatility and maximum drawdown (based on the SG Trend index).
Concurrently, L/S Credit, EM Macro and Risk Arbitrage also outperformed in January, up +0.6%, +0.5% and +0.3%, respectively. Our stance on such strategies has been and remains highly constructive (Overweight). As expected, L/S Credit and Merger Arbitrage managed to contain the recent rise in risk aversion. Both were flat over the last two weeks of January. For the full month of January, Merger Arbitrage was up +0.3% on the back of the tightening of deal spreads for some transactions such as Mellanox vs. Nvidia and Allergan vs. AbbVie in the health care sector. Finally, EM Macro strategies were highly resilient to the extent that the disinflationary nature of the coronavirus outbreak dragged Treasury yields lower. EM sovereign debt in hard currency tends to be supported by falling bond yields in developed markets.