While the world battles the coronavirus pandemic, China has already made strides towards mitigating the virus’s effect on its people and economy. Although the country is not yet out of danger, we expect China’s economy to recover in the second half of this year – which could be another positive signal for China’s domestically driven A-share market.
The US Federal Reserve cut rates to near zero over the weekend in a bid to ease pressure on the global financial system. Yet stockmarkets are unlikely to be reassured. With the course of the coronavirus outbreak uncertain and governments acting increasingly aggressively to contain or delay its spread, a global recession looks all but certain. Investors should recognise that we are in bear-market territory and adjust accordingly. US Treasuries and gold could do well, but investors may also want to add risk in undervalued sectors such as energy.
What’s unnerving for markets is that the full downside risk of the coronavirus is difficult to quantify. And it comes when the world economy is facing a downturn, central banks have little policy ammunition left and global leverage is again at record levels. While there are typically several conditions that signal when a bear market in risk assets has come to an end, we don’t think all these conditions have been met. Investors should, therefore, remain cautious as the economic effects of the coronavirus continue to spread.
As covid-19 spreads, fear of uncertainty has gripped the financial markets. Equity and oil markets have fallen, and investors have flocked to investments perceived as safer, including government bonds (particularly US Treasuries), cash (particularly the US dollar) and gold. Is this the right move? We believe caution is warranted, but we also think investors should pause before reflexively hitting the panic button.
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.
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.