Rolling Coronavirus updates - ECB 'like a doctor who has run out of medicine'

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InvestmentEurope is providing ongoing coverage of responses from the fund industry to developments linked to the spread of Coronavirus.

06/03 1335 UMT - Adverse effects on global economic growth

Guy Wagner, CIO at BLI - Banque de Luxembourg Investments, has commented:

"Most major stock market indices declined by more than 10%. Over the month as a whole, the MSCI All Country World Index Net Total Return expressed in euros fell by 7.3%. The S&P 500 in the United States, the Stoxx 600 in Europe, the Topix in Japan and the MSCI Emerging Markets fell by 8.4% (in USD), 8.5% (in EUR), 10.3% (in JPY) and 5.4% (in USD) respectively.

"In terms of sectors, energy stocks were particularly impacted. There was also less discrimination within the markets as the traditionally more defensive sectors such as consumer staples, healthcare and utilities were not spared by the slump. In China, economic growth collapsed in the wake of the virus, with the manufacturing sector activity index plummeting from 50 to 35.7 in February. Uncertainties over the spread of coronavirus are significantly reducing visibility about the global economy's growth prospects."

Government bonds fully resume their role as safe havens

"The spread of coronavirus outside China has triggered a sharp increase in investors' risk aversion, with government bonds fully resuming their role as safe havens. In the United States, the yield to maturity on the 10-year Treasury note plunged. In the eurozone, the 10-year government bond yield fell in Germany and in France but rose in Spain and in Italy.  Southern European government bonds were unable to benefit from the rush to non-risky assets."

Federal reserve cuts key interest rate due to Coronavirus

"Because of the Coronavirus, the US Federal Reserve unexpectedly cut its key interest rate by 0.5% to support the economic activity. In Europe, ECB President Christine Lagarde was more reserved, considering that it is still too early to consider further monetary expansion measures."


06/03 1328 UMT - Low rates on Treasuries may provide a shot in the arm for US consumers

Nikki Howes, investment associate at Heartwood Investment Management, the asset management arm of Handelsbanken in the UK, has commented:

"This week, for the first time in history, the yield (ie, the total return expected on a bond each year if held until maturity) on 10-year US government bonds dropped below 1%. While this drop came as a result of an increase in demand from nervous investors fleeing to the relative safety of government debt, it could ultimately have a positive impact on US consumers. Why is this?

"The yields on Treasuries (US government bonds) effectively serve as indicators of the ‘cost of money' over the coming years. As a result, US mortgages are typically set using the yields on Treasuries as a guide. So, when Treasury yields move lower, mortgage rates can quickly follow suit.

"With the yield on the 10-year Treasury moving to all-time lows this week, many US homeowners could now be looking to refinance their mortgages at lower rates. And while Treasury yields are still likely to move around a little as markets digest the unfolding coronavirus event, probable further interest rate cuts from the US central bank are set to keep these yields at very low levels. Bond market investors across the world have been forced to become used to ultra-low bond yields in recent years, and the US market is no exception.

"Given the potential for an enormous wave of mortgages across the US to be refinanced at lower interest rates, these developments could enable higher spending by the all-important US consumer, which has been a key driver of the recovery in world markets since the global financial crisis in 2008. Amid ongoing concerns for global growth, such a shot in the arm to US consumer spending would be very welcome indeed."


06/03 1325 UMT - Five investment tips to help cope with crises' like coronavirus

Adrian Lowcock, head of personal investing, Willis Owen, has commented:

"Being an investor when markets turn tough like recent weeks is stressful, there is no denying it. But it needn't be a disaster for you or your portfolio.

"Investing is an inherently long-term game. If your horizon is further than five or 10 years, the current falls will eventually just be a blip in your portfolio history. And if your horizon is shorter, such as for those approaching retirement, your portfolio should already have had some form of downside protection anyway.

"Investing is all about the long term, not what happens today. As such if you focus on the long term then it can help give you perspective on the short term volatility in markets and put any sell-offs in to context. Such events are usually short term in nature, and markets tend to over-react as investors act on emotion not fact.

"Nonetheless, here are five key mantras to have in mind amid the market turmoil:

  1. Do not panic - It is clear that some investors are panicking and whilst an understandable reaction it is important to remember that making investment decisions based purely on emotions are rarely a good idea.
  2. Take some time - Give yourself some breathing space, take time to review the situation, think about what you are really trying to achieve with your investments and what, if actions you can take now to help you achieve your goals.
  3. Get some insurance - As part of a diversified portfolio it is important to have some assets which tend to perform well when investors get risk-averse. This includes exposure to gold, government bonds and absolute return funds. These assets are unlikely to perform as well as investing in shares but they are good at capital preservation.
  4. Have some cash - It is always a good idea to have a bit of cash set aside so that you are able to take advantage of any big falls in markets. It is hard to predict exactly when markets will fall or indeed how far, but it is much easier to put money to work once the markets have fallen.
  5. Accept the volatility - The fact of the matter is that investing in shares and other assets means the value of your investment will rise or fall depending on a wide range of conditions. Whilst it may be possible to predict some events and how markets react, it is not possible call them all right all of the time.  It is important to accept that volatility is part of the journey and take the rough with the smooth."


06/03 1310 UMT - Gold sales surge

Josh Saul, CEO of The Pure Gold Company, has commented on the 846% increase in people purchasing physical gold bars and coins this week:

"Over 67% of sales have come from first time investors. They've watched businesses like Flybe collapse under the pressure of the coronavirus effect, and along with the repercussions of unemployment, they believe there are other businesses that are likely to follow suit. 

"In a survey carried out at The Pure Gold Company, over 43% of clients who work in hospitality, retail and the service industry said they have seen turnover slide 30%. Meanwhile clients who work in large scale events including concerts are cancelling plans over the short to medium term. Many believe that these are the ingredients for a recessionary environment that could very well spiral out of control. It's simple - if people believe they need to conserve money, they spend less and it becomes a self-fulfilling prophecy. 

"Our clients are watching the stock market seesaw and businesses underperforming, and they're turning to gold as an obvious solution to the uncertainty. Gold has a track record of increasing in value while currencies, equities and confidence fall amidst the uncertainty. The gold price has risen almost 9% in the past 30 days so clients who bought earlier in the year will have seen their portfolio grow quickly over this time. That said, our clients are not purchasing gold to make money. It's more about protection during times of unpredictability, ensuring the value of their assets isn't eroded by market declines. 

"Some of our professional clients have suggested converting their gains in gold over the more medium term. They want to be able to invest in potentially undervalued asset classes like equities if the opportunity presents itself. The liquidity of gold (it can be converted to cash within 24 hours), enables them to make these investment decisions quickly.

"We have seen a 523% increase in retirees removing exposure to equities within their SIPP / Pension to purchase physical gold bars within the same vehicle. These clients are very concerned that the coronavirus has the potential to wipe out the value of their retirement pot and are being proactive to protect their assets. 

"We've also had a 213% increase in ultra-high net worth individuals purchasing physical gold from The Pure Gold Company on recommendation of their own professional advisors who have stated it's the only asset class immune from coronavirus and the underlying uncertainty of Brexit, US elections and various tensions around the world."


06/03 1300 UMT - China's place as an EM

Francois Perrin, head of Asia at East Capital, has commented:

"China has been the biggest story for emerging markets over the last decade and China and today more than 90% of the returns in the region are driven by either macro factors or China. China will remain the biggest story for EM in the coming decade.

"We expect that A-share inclusion in emerging market indexes will be achieved within 5 to 8 years and by then, China will represent almost half of MSCI Emerging Markets index exposure.

"While remaining decoupled from developed and other emerging markets, Chinese A-shares offer today a compelling long term investment opportunity that will continue to be supported by rising institutionalisation of market participants, reduction of market turnover and retail activity, and convergence of domestic valuation toward global metrics."

How China will overcome various hurdles

"The Chinese government has been calling for more proactive fiscal policy and more flexible policy. Local governments have announced Rmb11tr projects to boost the economy and the PBOC has been very active to prevent any liquidity stress for small and medium enterprises. This will definitively support the economy.

"The average capacity utilisation rate across China has been reaching close to 60% at the beginning of the week. If small businesses have been more impacted and business condition indexes have been weakening significantly, we start to see in recent days a significant pick-up in activity levels this week due to work resumption in particular in China major cities.

"Market volatility is intrinsic to asset management and investment activities. In the current environment, we continue to favour structural growth investment opportunities across emerging markets. If the current virus outbreak may impact business activities during 1Q20, the high quality companies we favour will recover at a faster pace than their peers. With MSCI World (developed markets) down 6.8% YtD in USD versus MSCI China A (domestic Chinese market) positive, up 5.7% Ytd, we are constructive on the investment opportunities offered by Chinese A-shares and the diversification offered by the Chinese domestic market , trading at P/E20e 11x for EPS growth of 13% expected."