Coping with Coronavirus-Induced Market Volatility: A Multi-Asset Update

The spread of the coronavirus has created heightened market volatility in recent weeks, but the Franklin Templeton Multi-Asset Solutions team remains focused on long-term market fundamentals. Here, Ed Perks and Gene Podkaminer offer an update on how they are approaching the situation, and which countries appear more insulated to growth shocks.

We begin by re-emphasizing the key conclusion of our last commentary on this subject: we believe it is important to maintain diversified portfolios, particularly in times of increasing investment uncertainty. This approach has proven to be beneficial over the last several weeks as volatility has picked up in equity, fixed income and commodity markets.1

We continue to follow a process that resists the temptation to trade around news flow and emotion. Instead, we focus on how the evolving macro-economic backdrop is affecting market fundamentals and adjust our asset allocation views accordingly. Our asset allocation strategy focuses on regions that are more insulated from the growth shock and have enough policy flexibility to respond accordingly. The United States and the United Kingdom both fit this description, whereas the eurozone is in a less favorable position.

More broadly, the range of uncertainties—both medical and market—tempers our enthusiasm to increase holdings of stocks and other riskier investments at this time. However, as we look ahead over the next year, we continue to see attractive return potential from global equities.

Reviewing Our Initial Premise

Our initial premise was that the coronavirus would impact economic growth with the following characteristics:

  1. Geographic: Centered around China and Asia
  2. Duration: A sudden short shock that would be mostly felt in the first quarter of 2020
  3. Response: The greater the growth impact, the larger the commensurate policy response

We are closely monitoring the situation to validate if these views are supported by updated data. Given recent developments, below are some of our updated views.

Update: Geographic Impact

There is little doubt that Chinese economic activity has slowed during the first quarter of 2020; it is more a question of by how much? A variety of daily production indicators, such as passenger traffic or daily power coal consumption, signal very little rebound in activity. Business confidence surveys reflecting February activity also confirm the growth slowdown in China.

Outside of China, we can observe that the slowdown in activity is having an impact on neighboring countries in the chart below (most recent datapoint reflects February activity).