Logan Capital Dividend Performers Market Update – February 2020

Market trends have recently turned negative as investors have become increasingly concerned about the economic impact and the global reach of what has now been named SARS-CoV-2, the latest coronavirus to threaten world health. Sadly, confirmed cases of the flu-like disease have exceeded 80,000 globally while deaths are nearing 3,000 (Bloomberg). While the virus appears to have initiated in China, new cases are slowing there while Europe and South Korea are now bearing the brunt of new appearances of the virus. Luckily, the resulting disease has a relatively low mortality rate of 3.1% so far versus the SARS epidemic of 2003 that killed about 10% of those infected (WHO, Goldman Sachs). Notably, this virus is likely to impact more people by comparison.

History Has Few Examples

The human and social costs of this new virus strain will be felt for a long time and history will judge whether actions taken were effective. However, from an investment perspective, we believe the impact on the equity markets may be more contained, but nonetheless highly disruptive and difficult to predict. We do not have many examples of global “pandemics”, but certainly SARS (2003) and Avian Flu (1997) were relatively recent experiences. However, the world has changed dramatically since then. For example, China is far larger ($13.9 trillion GDP, 17% of global GDP, Bloomberg data) and medical science has improved substantially as well. Given that China is now the second largest global economy, and a significant amount of the growth, when it slows the global impact is substantial. For the US, we think GDP will now slow meaningfully in the first quarter of this year. One statistic puts the impact in perspective: 50% of imports into the US come from China. If China cannot produce and ship, retail sales and industrial production in the US are likely to suffer.

Less China Product = Lower Demand

The impact of the virus on US growth is likely to come from four main channels, namely 1) reduced US goods exports to China, 2) reduced spending in the US by Chinese tourism/students/workers, 3) a decline in US retailers’ revenue from lower US consumption of imported goods, and 4) a decline in US production due to supply chain production disruptions. The first two channels reduce output by lowering demand, while the latter two channels reduce output through a reduction in supply. Therefore, we expect to see numerous management teams lowering their near-term earnings guidance for the year and in fact are already seeing it.

Lofty Starting Point

Up until the advent of the virus in China, year-to-date US equity market returns had been quite positive after a very strong year in 2019. This has led to relatively high valuations in the stock market, particularly in some areas of technology and certain sectors considered to be safe havens. This made the market more vulnerable to a pull back as economic risks became evident. Inevitably, a market pullback may be somewhat healthy as long-term earnings growth catches up with valuations, creating a more attractive market for investors.

This Too Will Pass

We believe the coronavirus will run its course as containment efforts slow its growth and medical science develops targeted solutions. The global economy should begin to lift as the Chinese workforce resumes producing goods and services, export markets open and transportation resources get back on track. China has already suggested it will provide more stimulus for its economy while US monetary stimulus is still accommodative. Recall that prior to the onset of the virus, the global economy was beginning to turn based on improved trade relations between the US and China as well as the passing of the USMCA trade agreement. From a monetary basis, employment and demographics in the US are positioned for steady growth that is only being enhanced by massive spending on new technologies that make the workplace more efficient and productive. While it is impossible to determine the timing, we think the world will overcome SARS-CoV-2 soon. This makes us think any major market pullback related to this as a potential buying opportunity.

Dividend Growth Remains Resilient

We think our Logan Capital Dividend Performers strategy remains a good way to address the current market dynamics. Our universe of stocks is more likely to have higher dividend growth, higher dividend yields, more stable cash flows and durable business models versus the overall equity market. Dividend growth is a good way to overcome low interest rates as well as manage through the volatility caused by the coronavirus. The Logan Capital Dividend Performers strategy and its Balanced version is an attractive way for clients to successfully navigate through volatile markets and grow income over time.

Christopher O’Keefe, CFA
Lead Manager, Logan Dividend Performers Strategy

This material represents an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Past performance does not guarantee future results.

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