The onset of the Covid-19 virus coupled with a potential oil supply surge due to an unexpected conflict between Saudi Arabia and Russia resulted in global equity declines for 1Q 2020 on par with those seen in 1987. Like the 2008 global financial crisis, correlations went to one and indications of fear as noted by global equity volatility indexes reached extreme levels. Cash was king and one of the only safe havens for investors. In sharp contrast to 2019 performance, the MSCI EAFE Index lost -24.3% during the first quarter of 2020, while in the U.S., the S&P 500 lost -19.6%. Regional and country specific indexes including Europe, Japan and the Emerging Markets declined -24.3%, -17.7% and -23.6%, respectively.
By quarter-end, equity markets showed some sign of stabilization as massive levels of fiscal and monetary stimulus were pumped into the global economy. During February and March alone, there were 253 fiscal and monetary stimulus measures announced around the world. Most recent was the passage of the $2.2T Coronavirus Aid, Relief and Economic Security (CARES) Act in the U.S. Additionally, the U.S. Federal Reserve cut interest rates to zero and launched a $700B Quantitative Easing program. To put this into perspective, current Fed purchases are enough to complete QE1, which occurred in 2008 during the global financial crisis, every ten days.
Outside the U.S., $6T of stimulus was announced including a €750B Quantitative Easing program by the European Central Bank (ECB). The U.K. also ramped up bond purchases and cut interest rates to near zero or the equivalent of 300 basis points (3%), while Japan agreed to inject $526B into their economy. Emerging market central banks in Thailand, India, Mexico and Pakistan also eased interest rates to boost their markets, while China (RMB 1.3T), India ($50B), Malaysia ($58B) and Singapore ($33B) announced fiscal support for their economies. Global short rates are now below 1.0% and have fallen further than they did in 2008.
Performance and Attribution
The Timothy Plan International Fund fell in step with global equity markets but was able to continue its relative outperformance versus the MSCI ACWI ex. US index. Sector allocation and stock selection were both positive versus the index for the quarter. From a sector allocation standpoint, cash was helpful in addition to an underweight to Energy and Real Estate and overweight to Technology. In stock selection, the Fund benefitted from good selection in Consumer Discretionary, Industrials, and Communications Services which more than offset poor selection in the quarter in Health Care sector as screened out names in European pharma performed well. Strong relative performance for the quarter included Fujifilm (Japan-Technology), Pan Pacific (Japan-Discretionary), and Kerry Group (Ireland-Staples). From a country standpoint, Canada, Japan, and Germany provided the best alpha for the Fund while Norway and an underweight to Switzerland proved more challenging.
The market dislocation during the first quarter has given our team the opportunity to evaluate attractive companies in various sectors where long-term structural growth stories with solid fundamentals now have compelling valuations. The shape of the recovery is difficult to predict at this point. However, if history is any guide to post exogenous stock performance, returns are likely to be very attractive as infection rates peak and decline, communities around the globe resume their normal daily activities and global growth returns to an upward trajectory. We have a slightly larger than normal cash weight in the portfolio and will be careful to redeploy as opportunities arise and as time allows for this downturn to mature.