Having broadened and deepened its fixed income capabilities significantly over many years, AllianzGI is now taking the natural next step in the evolution of its fixed income offering by bringing its capabilities into an integrated, global structure.
We expect this outbreak to hurt China’s economy in the short term, but we are still positive about the country’s long-term prospects. Throughout Asia, supply-chain troubles will likely have a broadly negative effect. But we don’t expect the global economy to be hit as hard as China’s: central-bank policies, corporate earnings and stabilizing economic fundamentals still seem supportive of global risk assets.
While the recent drag on China’s economic growth has been mostly caused by the government’s efforts to contain the Wuhan coronavirus, those are necessary steps to get the situation under control
China’s central bank has already taken steps to bolster its economy, and we expect further stimulus measures to be announced
Long term, we think investors should still be optimistic about China’s potential, although we expect China’s insurance sector, airports and leisure industry to suffer in the coming months
Comparisons between this new coronavirus and the SARS epidemic of 2002-2003 may be unhelpful because the world – and China’s role in it – are very different now
We expect this virus to affect the global economy less than China’s – but supply-chain problems will likely put pressure on economic fundamentals, which are fragile but have been improving
Coronavirus: what’s at stake for investors?
The outbreak of the Wuhan coronavirus is the first “black swan” event of 2020. It has made investors exceedingly nervous given China’s history of infectious-disease outbreaks and fears of the virus spreading quickly around the globe.
These concerns are understandable, given that hundreds of deaths have already reported and researchers are just beginning to learn how this virus works. The steps China has taken in response – including quarantining tens of millions of people and extending the closure of its stock exchanges beyond the Lunar New Year holiday – have already caused economic damage and a large one-day drop in China’s equity market. (However, global markets have rallied after an initial sell-off on hopes that the virus transmission may slow in the coming weeks and new treatments could prove effective.)
Overall, we still have a positive long-term view of China, particularly if the outbreak is brought under control in the coming months. This will take herculean efforts that will undoubtedly come at a huge cost, but we think the Chinese government has the will and means to implement them. In fact, the People’s Bank of China already injected huge amounts of liquidity to counter the impact of this new outbreak – though we don’t expect this stimulus to improve economic conditions substantially until the virus has been contained.
How could this outbreak affect economic growth?
Global growth will likely be affected by a China slowdown
Although some market-watchers have compared the potential economic impact of this new coronavirus and the 2002-2003 SARS outbreak, there are important differences to consider. We don’t yet know the true nature of this new disease, and China has grown much bigger and more economically important since SARS. Moreover, we are now late in the global economic cycle, not at the beginning of an upswing (SARS happened when the global economy was already recovering from the burst of the tech bubble) and overall, valuations are generally elevated today vs moderate during SARS times. On the positive side, communications and medical technology has improved drastically since SARS. All these factors make the economic impact of this outbreak exceedingly difficult to predict – but a slowdown in China today will likely hurt global growth more than it did 20 years ago.
China’s GDP was already falling and will likely drop further
Even before this disease began to spread, China’s growth was slowing somewhat as the government worked to lower its economy’s overall debt levels and “rebalance” towards a consumption-driven model. We think the Wuhan coronavirus has the potential to depress China’s 2020 GDP growth by one percentage point, moving it closer to 5% – though this would still be higher than the growth seen in much of the developed world.
Asia’s optimism over trade may subside
Recently, other Asian economies appeared ready to bounce back on optimism surrounding a US-China trade deal. But Asian investors have turned cautious on the realisation that the spread of the Wuhan coronavirus and accompanying quarantines could be much more disruptive to global supply chains than trade tariffs. On the positive side, central banks in Asia still have room to supply monetary stimulus to attempt to jump-start economic growth.
What are the implications for investors?
In China, expect to see more setbacks in key sectors that have already been hurt by the outbreak – including tourism, airlines, gaming, and even oil and other commodities.
In the US, risks are more sector-specific – oil and energy, travel and tourism, and some retail/luxury brands could slide lower. But if the virus is contained in the US, we believe investors will once again focus on the fundamental factors that have been moving markets – including corporate earnings, Fed monetary policy, broader economic data and US politics.
In Europe, we had started to see tentative signs of stabilisation in manufacturing and trade. But the Wuhan coronavirus may derail this modest recovery in the short term, since European economies are large trading partners of China and Asia.
Globally, until this epidemic is brought under control, multinational corporations will worry about lost revenues, lower trade, and potential store closures in China. Supply chains globally will likely feel an impact if the flow of goods slows or people move around less – whether from quarantines or general virus fears.
Overall, barring any lasting economic shocks from the epidemic, we continue to see a supportive backdrop for risk assets, in the US and globally, with an environment of generally low rates, low inflation and stable growth. But more equity-market volatility should be expected, particularly after a stellar year in 2019. Keep in mind that equity markets have typically experienced between one and three corrections of 5%-10% per year. The Wuhan coronavirus could still spark the first correction of 2020.
Previous outbreaks caused only temporary setbacks for US stocks
S&P 500 Index (1930-2020)
Source: FactSet. Data as at 3 Feb 2020. Past performance is no guarantee of future results.
Mona is the US investment strategist and a director with Allianz Global Investors, which she joined in 2017. As a member of the Global Economics and Strategy team, she is responsible for providing US retail and institutional clients with differentiated investment thought leadership.
Christiaan is Senior Economist, Asia Pacific with Allianz Global Investors. He joined the firm in 2018 and is based in Hong Kong. As a member of the Global Economics & Strategy team, Christiaan is responsible for regional economics and strategy research.
Coronavirus spread forces investors to think again
As the humanitarian costs of the coronavirus continue to rise, outbreaks beyond China are challenging the previous consensus view that the impact on markets could be relatively contained. Global stock markets are down, and negative sentiment may become a self-fulfilling prophecy, adding to the need for caution and an active approach.
China has acted to bring the coronavirus under control, but global outbreaks will prolong uncertainty and stock markets across the world have been impacted
While the outbreak is impacting demand – both in China and globally – there will also be global supply implications, particularly for the automotive and technology sectors
We expect the dominant trend to be a “flight to safety” into the US dollar and US assets
This crisis underscores the vulnerable outlook for global risk assets following a strong end to 2019, but long-term investors will want to sit tight and monitor how events play out
Investing involves risk. The value of an investment and the income from it will fluctuate and investors may not get back the principal invested. Past performance is not indicative of future performance. This is a marketing communication. It is for informational purposes only. This document does not constitute investment advice or a recommendation to buy, sell or hold any security and shall not be deemed an offer to sell or a solicitation of an offer to buy any security.
The views and opinions expressed herein, which are subject to change without notice, are those of the issuer or its affiliated companies at the time of publication. Certain data used are derived from various sources believed to be reliable, but the accuracy or completeness of the data is not guaranteed and no liability is assumed for any direct or consequential losses arising from their use. The duplication, publication, extraction or transmission of the contents, irrespective of the form, is not permitted.
This material has not been reviewed by any regulatory authorities. In mainland China, it is used only as supporting material to the offshore investment products offered by commercial banks under the Qualified Domestic Institutional Investors scheme pursuant to applicable rules and regulations. This communication's sole purpose is to inform and does not under any circumstance constitute promotion or publicity of Allianz Global Investors products and/or services in Colombia or to Colombian residents pursuant to part 4 of Decree 2555 of 2010. This communication does not in any way aim to directly or indirectly initiate the purchase of a product or the provision of a service offered by Allianz Global Investors. Via reception of his document, each resident in Colombia acknowledges and accepts to have contacted Allianz Global Investors via their own initiative and that the communication under no circumstances does not arise from any promotional or marketing activities carried out by Allianz Global Investors. Colombian residents accept that accessing any type of social network page of Allianz Global Investors is done under their own responsibility and initiative and are aware that they may access specific information on the products and services of Allianz Global Investors. This communication is strictly private and confidential and may not be reproduced. This communication does not constitute a public offer of securities in Colombia pursuant to the public offer regulation set forth in Decree 2555 of 2010. This communication and the information provided herein should not be considered a solicitation or an offer by Allianz Global Investors or its affiliates to provide any financial products in Brazil, Panama, Peru and Uruguay. In Australia, this material is presented by Allianz Global Investors Asia Pacific Limited (“AllianzGI AP”) and is intended for the use of investment consultants and other institutional/professional investors only, and is not directed to the public or individual retail investors. AllianzGI AP is not licensed to provide financial services to retail clients in Australia. AllianzGI AP (Australian Registered Body Number 160 464 200) is exempt from the requirement to hold an Australian Foreign Financial Service License under the Corporations Act 2001 (Cth) pursuant to ASIC Class Order (CO 03/1103) with respect to the provision of financial services to wholesale clients only. AllianzGI AP is licensed and regulated by Hong Kong Securities and Futures Commission under Hong Kong laws, which differ from Australian laws.
This document is being distributed by the following Allianz Global Investors companies: Allianz Global Investors U.S. LLC, an investment adviser registered with the U.S. Securities and Exchange Commission; Allianz Global Investors Distributors LLC, distributor registered with FINRA, is affiliated with Allianz Global Investors U.S. LLC; Allianz Global Investors GmbH, an investment company in Germany, authorised by the German Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin); Allianz Global Investors (Schweiz) AG; Allianz Global Investors Asia Pacific Ltd, licensed by the Hong Kong Securities and Futures Commission; Allianz Global Investors Singapore Ltd, regulated by the Monetary Authority of Singapore [Company Registration No. 199907169Z]; Allianz Global Investors Japan Co, Ltd., registered in Japan as a Financial Instruments Business Operator [Registered No. The Director of Kanto Local Finance Bureau (Financial Instruments Business Operator), No. 424, Member of Japan Investment Advisers Association and Investment Trust Association, Japan]; and Allianz Global Investors Taiwan Ltd, licensed by Financial Supervisory Commission in Taiwan.