- Total long-term flows registered a positive two-week period for the first time since the start of 2019, according to the Investment Company Institute. For the two weeks ended January 22, total long-term inflows were more than $12 billion, although the positive figure was mainly due to strong bond inflows.
- The divergence between bond mutual funds and equities has rarely been this high. Equities recorded around $12 billion in outflows, while bonds enjoyed more than $24 billion in inflows. Hybrid instruments were slightly negative, and their impact on the overall picture was negligible. Investment-grade and government bonds experienced the highest inflows, while large-cap and multi-cap equities saw the biggest withdrawals.
- After a relatively strong start to the year, the markets experienced a shock in the form of the coronavirus outbreak in China. Many flights to and from China have been canceled, and Wuhan, the Chinese city where the crisis started, has been isolated. The response from global authorities has been quick and there is optimism that the outbreak will be stopped before it is too late. The economic impact of the outbreak will be felt if trade relations with China are halted.
- Britain officially exited the European Union last week, marking the end of an era in the eurozone bloc. However, the difficult part is just beginning for the U.K. The current rules will prevail until December 31, 2020 by which date the sides need to find an agreement on their future trade relations. Failure to achieve a deal will result in a hard Brexit, and trade between the two nations will be downgraded to the rules of the World Trade Organization.
- The U.S. Federal Reserve left its monetary policy unchanged at a range between 1.5% and 1.75%, but noted that household spending has been “moderate” compared with “strong” in December.
- The Japanese central bank also kept its monetary policy steady, as largely expected, but it increased its growth forecasts thanks to its view that global risks are receding. Bank of Japan believes the economy will grow by 0.9% in the fiscal year beginning April compared with 0.7% previously.
- The European Central Bank policymakers also voted to keep the main deposit rate at a historic low of negative 0.5%, as markets had predicted. ECB President Christine Lagarde said the bank will maintain its accommodative monetary policy until inflation picks up to a level close to but still below 2%. Lagarde said the risks in the euro area remained tilted to the downside and the bank stands ready to adjust its monetary policy if inflation prospects deteriorate further.
- Britain retail sales fell 0.6% in December, marking the fifth consecutive month of no positive showings. In November, retail sales declined by a similar amount. Last time, retail sales registered growth was in August.
- European manufacturing purchasing managers’ index (PMI) is still in contraction territory, but there was an improvement. The PMI came in at 47.8 in January compared with 46.3 in the previous month and beating analysts’ expectations of 46.9. European services PMI, meanwhile, declined from 52.8 to 52.2, remaining in expansion territory.
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- Broad indices were all down, with the exception of safe-haven assets such as bonds.
- Vanguard’s international stocks fund (VGTSX) recorded the worst performance for the past two weeks, losing nearly 5% of their value. Clearly, fears about the coronavirus outbreak had a negative impact on investor sentiment.
- Meanwhile, Vanguard’s total bond market index fund (VBMFX), is now the best performer with a gain of 1.44%, whereas last time it posted the weakest performance.
- Sectors were largely down with a few exceptions.
- As expected, Franklin’s utilities sector fund (FKUTX) was the best-performing fund on our list with an advance of 2.7%, as demand for safe-haven assets was high.
- At the same time, the Vanguard’s energy sector fund (VGELX) lost more than 8% for the past two weeks, extending the negative streak for four consecutive weeks.
- All foreign equities posted heavy losses with one single exception.
- Matthews Chinese equities fund (MICDX) was the worst loser these past two weeks, shedding more than 10% of its value, as investors feared the coronavirus outbreak will hurt its already weak economy.
- Wasatch Indian equities fund (WIINX) bucked the trend, rising around 0.4% and being the only riser.
Major Asset Classes
- Major asset classes posted a mixed performance.
- Direxion’s commodities fund (DXCTX) lost nearly 5% these past two weeks, as there were fears that the coronavirus eruption might lead to reduced demand from China, which has been an avid consumer of many commodities.
- Meanwhile, PIMCO’s long-term bonds fund (PEDIX) was one of the most sought-after funds in its asset class, adding nearly 8% over the past two weeks as a result.
The Bottom Line
As expected, Chinese equities lost a great deal of their value, but India surprisingly bucked the trend and posted the only gain – albeit, a small one – among major foreign markets. Commodities suffered a blow, as demand from China is expected to fall if the outburst gets considerably worse.
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