Q2 2020 A Breath to Refresh
COMMENTARY FROM THE INVESTMENT COMMITTEE OF CORAL GABLES TRUST COMPANY
Q2 2020 - A Breath to Refresh
Across the pond, European economies have been able to emerge from the lockdowns without a significant rise in COVID-19 cases, but the economic cost has been devastating. Europe headed into the COVID-19 crisis with a lack of policy ammunition as its interest rates were already negative and there were strict rules around increasing fiscal deficits. Even with the European Central Bank expanding its asset purchase program to more than 10% of their GDP and relaxing its eligibility requirement for both sovereign and corporate issuers, the European Union continues to drag their feet compared to the U.S. The most far-reaching policy response is the proposal by Germany and France for a 750-billion-euro recovery fund that would be guaranteed by all twenty-seven members of the European Union. If enacted, it would represent an historic step in unity and stability. Despite ongoing difficulties, the major foreign indices turned in a positive quarter with the MSCI EAFE index returning +15% and the MSCI ACWI ex-US index returning +16.3%. On a year-to-date basis, the U.S. remains the superior performer leading those indices by an average of 13 percent.
After the robust U.S. Treasury rally in early March, the Federal Reserve's massive quantitative easing program eliminated much of the volatility from the market. With short-term yields anchored by the Federal Reserve's actions, we look to long-term rates to drive the changes in the yield curve. The 10-year treasury ended the quarter at 0.66%, declining 126 basis points, or 1.26% lower, from 12/31/2019. With investment grade corporate credit receiving the most direct support from the Federal Reserve, high quality corporate credit looks poised to offer the most attractive opportunities to fixed income investors. Riskier investments like high-yield bonds and preferred securities are gradually clawing their way back from the sell-off earlier this year. Foreign bonds were higher by +1.05% for the year, while the Barclays Aggregate Bond Index was higher by +6.14% for the year which is an index dominated by treasury securities.
THOUGHTS ON ASSET ALLOCATION
While markets are forward-looking vehicles and often bottom several months ahead of the economy, finding the actual bottom is usually a process. Looking ahead over the next 12 months, there will certainly be speed bumps along the way. However, we understand the risks facing both the markets and the economy and are committed to helping our clients navigate this challenging environment. Our Investment Committee has been extensively discussing rebalancing and positioning for the rest of the year. The Committee believes that the growth areas of the market will outperform value over the next couple of years as interest rates are projected to remain low for the foreseeable future coupled with weak global growth. In addition, we believe the U.S. is in better position to recover faster economically from the pandemic vs. our foreign counterparts and have elected to overweight our U.S. exposure even more than recent years.
Our best-in-breed managers continue to weather the challenging environment. Our Committee will always emphasize downside protection in our manager selection and our current roster of managers did not disappoint when comparing to their benchmarks. Listed below is a subset of our equity and fixed income managers that performed exceptionally well in the quarter.
We look forward to speaking with all of you regarding our views and the performance of your respective portfolios. For additional information or questions please contact Mason Williams, Chief Investment Officer, at 786-497-1214 or Michael Unger, Investment Officer, at 786-292-0310.