|Coronavirus update as at 3 March 2020
|On 30 January 2020, the World Health Organisation declared Coronavirus (CV) a “public health emergency of international concern.”
WHO recently declared that the outbreak in China had peaked, however they noted that there was a sudden increase in new cases, globally. The elevated risk of contagion saw the US Centre for Disease Control and Prevention caution that this may potentially develop into a pandemic.
These announcements triggered government authorities to implement emergency response plans covering health and containment measures. This remains an evolving situation that requires ongoing monitoring and assessment. As a result of the recent market turmoil, money flow at the end of February and start of March had been out of equities and high-yield debt, and into government bonds. Globally, bonds are now ‘very expensive’ which has seen global equities (which arguably are extensively oversold) trading at more attractive prices for long-term investors.
Globally investment-grade bonds have rallied very aggressively with many making new all-time highs (price), and lows in yields. At the other end of the spectrum, lower credit grade bond spreads have blown out considerably.
On the macroeconomic assessment to date, CV has seen a worsening in global sentiment despite stronger activity supporting the ongoing recovery in the US, Europe and the world. Monetary and fiscal measures are being ramped up in the Asian region. The Reserve Bank of Australia expects the outbreak to lower the near-term growth outlook and has increased uncertainty.
Outlook for equities
The global equity correction that began in the final week of February has led to a tightening in financial conditions. Driving the market fear is the risk that the coronavirus will have lasting effects, causing an ongoing supply and demand shock. It is likely that the spread of the virus will grow. It is also likely that in China the spread of the virus will slow and be brought under control. The market is only focused on the negative at the moment, but we expect to see this shift with stimulus and more containment. Despite the recent negative PMI release, which is reflective of the past month’s activity, there are early signs that China is back on the road to normality.
There is no doubt that global growth will be impacted by the dislocation on supply chains out of China as a result of this virus. This is why global policymakers will coordinate a prompt response. Clearly, there is also an impact on near-term corporate earnings, though the flipside to this is the opportunities in undervalued future earnings that will arise across the market.
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