Financial Market Recap
Financial markets have been rattled by the latest headlines around the coronavirus, with investors attempting to gauge the severity of the widening epidemic and the implications for global growth. While the outbreak has slowly been abating in China and businesses have gradually resumed operations, news that the deadly virus has spread outside of China has stoked fears of a wider pandemic and caused investors to reassess whether the outbreak will be contained in a timely manner.
Risk appetite has dwindled in response, with the gloomy mood manifesting itself and sending shockwaves through the global marketplace. After breaching all-time highs, global equity markets abruptly reversed course and have all but erased their gains for 2020. The MSCI All Country World is down more than 7% from the peak reached on February 19th. Meanwhile, government bond yields have been pummeled to unprecedented lows as investors sought refuge in the tumultuous trading environment, while gold and the US dollar have thrived as nervous investors bid-up these safe haven assets. Not surprisingly, industrial commodities have assumed the brunt of the weakness due to the near-term blow to Chinese demand, with both oil and copper the hardest hit so far in 2020.
Economic Fallout Will Be Transitory In Nature
The novel coronavirus emerged at a time when the global economy was finally showing some renewed signs of life. Global factory surveys rebounded meaningfully at the end of 2019 and in early 2020, the US economy was firing on all cylinders, and the beleaguered Chinese economy revealed the clearest signs of a cyclical upswing early-on in the new year. In other words, the worst of the factory-driven global economic slump was largely behind us.
We believe the outbreak poses some serious downside risks in the near-term amid China’s efforts to contain the virus. The economic revival in China has suffered a notable setback and activity data is certain to deteriorate in response to factory closures, restricted mobility, and the blow to the consumer-driven services sector. And the damage won’t be limited to China, with global firms bracing for supply-chain disruptions and a shock to demand from the world’s second largest consumer. And while newly reported cases are beginning to appear outside of China, the economic fallout has been negligible thus far.
The recent rebound in global economic activity will be due for a near-term pause – though the growth slump is likely to prove temporary as policymakers ramp-up their reflationary efforts to stem the damage. Importantly, policymakers in China have responded forcefully and have made reviving growth a top priority, while pledging to meet their stated growth targets for 2020. Already, the People’s Bank of China has lowered a series of benchmark interest rates and injected liquidity into an already-abundant financial market system, while fiscal policy is also becoming more assertive. What’s more, central banks in the developed world have singled out the virus as a significant downside risk and would not hesitate to act in the event of a major flare-up. Taken together, we believe economic weakness should prove short-lived and result in a sharp recovery later this year once the outbreak has been contained and pent-up demand is released, which could be further amplified by the vast amount of fiscal and monetary policy support already in place.
Outlook & Investment Strategy: Short-Term Pain, Long-Term Gain
As it is difficult to predict the duration and magnitude of the epidemic, plenty of uncertainty prevails at this time. It goes without saying that financial markets will remain extremely fragile until there’s more visibility surrounding the COVID-19 crisis, setting the stage for near-term volatility as investors weigh the various headlines on the status of the outbreak. That being said, our reflationary base case scenario for a Sustained Global Expansion in 2020 has been delayed, not derailed. In our opinion, the favourable conditions that underpinned the stock market rally leading up to the coronavirus remain firmly in place – namely an expected stabilization in global growth, receding tail risks pertaining to trade, and ample liquidity conditions. As such, we would resist the temptation to turn bearish at this time and maintain our preference for stocks versus bonds, while recommending that investors stay the course within the cyclical bull market for 2020.
