Global growth concerns spurred by the spread of the novel coronavirus have been significantly hurting global stock markets, but the pullback stands to present some opportunities as investors head for investments perceived to be safer, according to State Street Global Advisors executives.
“Rapidly evolving conditions bring great uncertainty,” Lori M. Heinel, deputy global chief investment officer at State Street, said Friday in a research note called “Coronavirus Update: Fear of the Unknown Slams Market Sentiment.” “We have become slightly more defensive where warranted but believe the market pullback will create select buying opportunities.”
Those safer investment possibilities include State Street’s SPDR Gold Shares ETF (GLD), according to Matthew Bartolini, managing director and head of SPDR Americas Research at State Street.
“We’ve seen trading volume spike” in the fund, he told ThinkAdvisor in an interview in New York Friday. GLD traded $6.1 billion in volume on Friday, a record high since April 2013, he said. For the entire week, GLD averaged $4.4 billion, also a high since April 2013, according to Bartolini.
Heinel also pointed to the safe haven of gold, saying: “Within our multi-asset and regime-aware portfolios, we have reduced positions in riskier assets such as equities and shifted into traditional havens such as gold and long-dated Treasuries.”
In mid-February, when coronavirus concerns were still pretty much focused on China, there was an apparent rush by some investors into what were perceived to be exchange-traded fund safe havens. Fixed income ETFs attracted $2.1 billion of inflows the week of Feb. 17, sending their monthly total across the industry to nearly $18 billion, according to State Street data. At the same time, gold-backed ETFs took in more than $700 million that week, boosting February’s total to almost $2 billion, the firm said. In addition, low-volatility equity ETFs took in nearly $2 billion that week, raising their total for the month to $3 billion, according to its data.
At least some market trends, however, shifted only a few days later. On Friday, Bartolini said that, in recent days, “what we’re seeing is a very violent selloff, driven by a growth shock from the coronavirus.”
The fact that this has started with consumers makes this different from prior shocks that raised growth worries in 2018 and 2019, he said.
The concerns are, therefore, “affecting the part of our economy that’s really done the heavy lifting over the past few years: The consumer,” he said, adding: “It’s impacting way of life and travel and work, across many different regions, particularly in China, which is a very important economy from a global perspective. And it’s very hard to draw past comparisons to, say, like the SARS event back in 2002 just because it’s such a more globally connected economy right now” in terms of supply chains.
What we are seeing now is an “uncertain market, driven by fear and the issue is that the resolution is equally as uncertain,” he said. When there is uncertainty over a trade issue, at least we know that some sort of negotiation could help, he noted. However, with what we are facing now, it is unclear “how far it will go and how much growth will be detracted, and we’re already starting from an area where we don’t have robust growth,” he said.
“I think that’s why you saw the selloff just continue to feed on itself” last week, he told ThinkAdvisor.
“From an ETF perspective, for us … we’ve seen massive trading volumes as investors once again have turned to the ETF ecosystem” for liquidity, he said. Trading volumes on his company’s S&P 500 ETF (SPY) reached $128 billion Friday on the secondary market, he pointed out. The company also saw “record volumes in our high-yield funds,” he said.
The coronavirus’ effect on markets didn’t exactly emerge overnight. State Street “started to see a little volatility creep up” in late January, he said. “But then it was largely felt to be more of a China-focused issue,” he noted.
State Street also saw the spot price of gold grow “much earlier than the rest of the market,” with strong returns in gold seen in the last week of January and the first week of February, before the equity and credit markets started to react to the coronavirus news, he said.
A lot changed, however, starting Feb. 24, when coronavirus stopped being just an “Asia-specific event and you had cases in Italy and some in Brazil” and elsewhere, he noted, adding that what “we’ve seen in the last four to five days is just a massive risk reduction.”
It made a lot of sense because, “in an uncertain market, you don’t want to be long in risk assets [when] you don’t know how long this volatility will be,” he said.
State Street has seen “a lot of traders and hedge funds, et cetera, just dial down their risk exposure [and make] more tactical investments” of late, he said.
Bartolini also pretty much wrote off President Donald Trump’s suggestion that the extreme stock market volatility seen last week was primarily a result of Americans being concerned about the Democratic presidential candidates they saw debating. “What we are seeing is really driven by the growth scare coming from the uncertain impact from the coronavirus,” he said. “Not to say that there’s not other noise in the marketplace, [but] political noise is commonplace,” he told ThinkAdvisor, adding: “The virus-led volatility is what’s in the driver’s seat.”
— Check out What to Expect After Last Week’s Market Carnage on ThinkAdvisor.