Camp #1: Proceed with Caution
It is impossible to predict the direction of markets when dealing with a pandemic, a crisis that has had significant consequences for public health and the global economy. A multitude of questions remain about the path forward. Will a treatment or vaccine become available in 2020 or 2021? How will consumer behavior be impacted by the virus and efforts to limit its spread?
John Davi of Astoria Portfolio Advisors suggests the crisis has helped to confirm the importance of a disciplined approach. “Over the past 18 months, we have been gradually increasing the quality of our fixed income and equities,” says Davi. Beyond that, he has focused on incorporating alternative asset classes to help dampen risk related to COVID-19 market turbulence. "We have always been a proponent of alternatives,” he says, “and the current market environment demonstrates why they can serve a valuable place in one's portfolios.”
Davi also suggests that investors may want to consider a diversified factor approach, including allocations to quality, profitability, divided yield, and minimum volatility equities strategies in current conditions. “We would expect low volatility ETFs and higher quality ETFs to hold up well on a relative basis if the current macro-economic and earnings environment stays weak. Higher volatility factor strategies like momentum, value, and size could suffer on a relative basis,” says Davi.
Robert Kuftinec of Auour Investments is also cautious about current conditions. His approach starts with thinking about China and the US and issues and challenges related to COVID-19 containment. “We don’t know if this is a pothole or the start of a rough road,” says Kuftinec. “China was hit hard by the virus. Their response was late, and when it came, it was draconian. Now, three months after their actions, we see their economy is going to be slow to recover. The US can likely expect a similar situation. Our response was also late, but being less draconian, may stretch out even longer.”
Kuftinec is also concerned about how aid packages will affect the debt burden on governments and questions the extent to which fiscal and monetary aid will help small and medium-sized businesses. “We do not have confidence [the Fed’s] actions will lessen the pain of Main Street. The US will likely experience high levels of bankruptcies, with the attendant risk that capital will not be returned to investors,” he suggests. “We will be watching to see how severe this scenario becomes and whether the markets are adequately braced for what might come.”
Kuftinec urges caution by investors, saying, “It’s time for patience. There are no trophies for being the first back in. We currently sit in a position from which our strategies can absorb the shocks that might be in front of us but from which we can also accelerate our position, when the time seems right, as we gain a better view of the road in front of us.”
Camp #2: Go Long
While cognizant of the challenging dynamics presented by today’s markets, Jay Pelosky of TPW Investment Management remains optimistic. “As 2019 ended we had the view that the global manufacturing slowdown had ended and European growth was picking up. Today’s data support that perspective, but COVID-19 – a true black swan – swam into the picture and disrupted the global economy in unprecedented manner.” explains Pelosky. “We believe that as of mid-April, the most tumultuous period is over. Markets have stabilized, deleveraging is complete, volatility has ebbed and the bear market correlation is breaking down.”
Pelosky cites the improving COVID-19 public health situation in China as part of his optimistic outlook as well. “[China] has reopened and other parts of Asia are following. European and American case curves are flattening, and after much sadness, the focus is shifting to the reopening process. We expect US and European companies to follow protocols used in their China operations to restart elsewhere.” Two important risks Pelosky believes investors should consider are a second significant wave of cases in the US and the risk US political infighting might pose to any additional monetary or fiscal aid. According to Pelosky, the question remains whether the bear market and global recession lead to a new bull market with new leadership, led by non-US instead of US equity. Nonetheless, he believes “ the second half of 2020 and [full-year] 2021 could mark a return to reflation.”
The Path Forward
In light of the federal fiscal and monetary response to the COVID-19 pandemic, there seems to be general consensus that the US economy has avoided a worst case scenario. That said, volatility risk remains as consumers, business leaders, and policymakers work with leaders in healthcare and monitor the potential for viable COVID-19 treatments in the months ahead. Perhaps now more than ever, investors need to ensure their portfolios are properly diversified and well-aligned with their risk tolerance and financial goals.
ETF General Risk: Exchange-Traded Funds (ETFs) trade like stocks, are subject to investment risk, and will fluctuate in market value. Unlike mutual funds, ETF shares are not individually redeemable directly with the Fund, and are bought and sold on the secondary market at market price, which may be higher or lower than the ETF's net asset value (NAV). Transactions in shares of ETFs will result in brokerage commissions, which will reduce returns. Active ETF: Unlike typical exchange-traded funds, there are no indexes that the Fund attempts to track or replicate. Thus, the ability of the Fund to achieve its objectives will depend on the effectiveness of the portfolio manager. There is no assurance that the investment process will consistently lead to successful investing. Equity Securities Risk: Equity securities are volatile and can decline significantly in response to broad market and economic conditions. Foreign Securities Risk: Foreign securities may involve heightened risk due to currency fluctuations. Additionally, they may be subject to greater political, economic, environmental, credit, and information risks. Foreign securities may be subject to higher volatility than US securities, due to varying degrees of regulation and limited liquidity. Currency Risk: Currency exchange rates between the US dollar and foreign currencies may cause the value of the fund's investments to decline.
This material is provided for informational purposes only and should not be construed as investment advice. The views and opinions expressed above may change based on market and other conditions. There can be no assurance that developments will transpire as forecasted.
Before investing, consider the fund’s investment objectives, risks, charges, and expenses. Visit im.natixis.com for a prospectus or a summary prospectus containing this and other information. Read it carefully.
Astoria Portfolio Advisors, Auour Investments and TPW Investment Management are not affiliated with Natixis Investment Managers or ALPS Distributors, INC.
ALPS Distributors, Inc. is the distributor of the Natixis Seeyond International Minimum Volatility ETF. Natixis Distribution, L.P. is a marketing agent. ALPS Distributors, Inc. is not affiliated with Natixis Distribution, L.P.