Coronavirus- where we are now
Global stock markets have taken a hit this week as they have fallen consistently in the wake of increasing concerns over the spread of Coronavirus.
That said, global markets still remains higher now than they were at the depths of the market dip six months ago, during the trade wars between China and the US.
The longer term expectation for global markets remains positive as the economic outlook is still supportive of rising markets and global growth.
In the near term though we expect further volatility. How long the volatility continues remains an unknown. Looking at previous global viruses such as SARS and Zika, there was a period of at least one quarter of negative growth that followed the outbreak, but with the Coronavirus it is harder to quantify. The mortality rates may well now rise simply because the reporting accuracy of the countries where Coronavirus has now reached are more reliable than the Chinese data which we have previously had to rely on.
The fact that Coronavirus is harder to differentiate from the traditional flu means the incubation period and quarantine which are being applied are much more stringent, with the net effect that supply chains are grinding to a halt.
Traditional safer havens in times of uncertain markets such as industrial metals and oil are not holding up. The price of Brent Crude is down over 20% year to date because the largest consumers of oil and metals are China and broader Asia. With parts of their manufacturing industry in shutdown and people not travelling, the demand for these commodities has fallen and so global stockpiles are increasing thus reducing the price.
The gold price has crept up steadily, but not because it offers any great value, more that it is a traditional safe haven. Interestingly though in previous economic crises, the gold price would move quite vigorously up and down, that has not been the case this time.
It is likely that we will see a recession in parts of the global economy as a result of the reduction in the export market. Japan and Europe seem to be most at threat. We don’t own any direct Japanese or European exposure in our portfolios. In Europe, Germany may enter a temporary technical recession thanks to the slowdown in auto trade and Italy was standing on the precipice anyway, so the news around the spread of Coronavirus may well tip it over the edge.
Fixed income has held up reasonably well, as have some of the other ballasts in the portfolios such as the JPM Global Macro Opportunities fund.
We are looking to make changes to our Chinese and Asian allocations although timing is important and with markets moving as rapidly as they are, there is little point in selling when the market may immediately rebound. Ironically, China, the source of Coronavirus has proven to be one of the most resilient markets since the initial outbreak, but we expect the quarterly results to be downward as a result of trade slowing and employment shut downs.
We do believe that this is a relatively short term situation. We aren’t medical experts, but we are looking to take advantage of areas of the market which we believe have more firepower remaining to withstand the virus, with the US and technology being such areas.
Whereas Europe doesn’t have the means or ability to prop up the market, the US has the option to cut interest rates to ease pressure. They won’t do this as a result of the Coronavirus alone, but if it starts to impact growth expectations, we can envisage cuts happening sooner rather than later.
We cannot paint a rosy picture, because we expect more of the same for the immediate future, but unless a global pandemic spreads across the US and the UK virulently, we don’t see the current state of markets as a fair reflection of economic growth or valuations. We think the first half of this year may not be comfortable, but assuming some control is restored, the boost to the supply chain in a recovery should be strong and a healthy rebound is expected.
This is a fluid situation, but now is probably not a good time to be monitoring the market daily if you are a longer term investor. We are taking action to position portfolios for some extended volatility as well as the predicted rebound, but in the meantime expect markets to move up and down significantly more than has been seen in recent years. That said as it stands today, we are relatively optimistic for 2020 as a whole.