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.

28/02 1505 UMT - JPMAM on potential economic impact

Karen Ward, chief market strategist for EMEA at JP Morgan Asset Management, has commented:

"The impact of the Covid-19 virus and the ramifications for global economic activity and corporate earnings are leading to a significant re-pricing across markets.

"It has taken significant restrictions on travel, and in turn production, to slow the pace of infection in China. We are tracking daily indicators, such as coal consumption and migrant flows to assess how quickly China ‘returns to work'.

"While infection rates have slowed in China they have accelerated elsewhere. The market is anticipating that the type of travel restrictions seen in China could be required around the world which would hurt global earnings.

"Whilst the length of the production slowdown depends largely on the infection rates (which are unpredictable), the ability of the economy to bounce back strongly depends in large part on whether we see effective policy intervention.

"Targeted measures to help businesses manage their costs during a period of production shutdown and low earnings will be critical, in a bid to prevent second round effects (like staff cuts).

"The market is expecting interest rates to be cut quickly and decisively globally. Monetary policy alone might not support corporate earnings but the insurance that core bonds can provide to a portfolio has been demonstrated once again, despite the low starting level of yields."

 

28/02 1450 UMT - Global sell-off could be seen by investors as best buying opportunity in a decade

Nigel Green, CEO and founder of deVere Group, has commented:

"Until this week, the markets had largely shrugged off the impact of the outbreak of coronavirus.  We warned about complacency leaving many wide-open to nasty surprises.

"This has now changed. Investors have done a ‘one eighty' - from a muted overly confident reaction to the serious and far-reaching global issue of coronavirus to running like headless chickens. 

"Both extremes are worrying and could potentially wreak havoc on investors' returns.

"However, the worst global market sell-off since the 2008 crash will almost certainly become an important buying-opportunity for many investors. 

"With markets on the brink of correction territory, panic-selling, mis-pricing of high quality equities, and lower entry points, this could turn out to be one of the key buying opportunities in the last 10 years.

"Some of the most successful investors will embrace volatility to create, maximise and protect their wealth.

"As ever in times of increased turbulence, there will be winners and losers. A professional fund manager will help investors take advantage of the opportunities that volatility presents and mitigate potential risks.

"In the current volatile environment, investors - including myself - will be revising their portfolios and drip-feeding new money into the market to take advantage of the opportunities whilst reducing risk at the same time.

"Global investors should not be spooked by the return of volatility on stock markets but, where possible use it to their financial advantage.  

"Of course, no-one knows for sure what will happen in the immediate future but, as stock markets typically rise over a longer-term period, now is the time to capitalise on the more favourable prices of decent stocks.

"It can be expected that in coming days, serious investors will be bargain-hunting."

 

28/02 1350 UMT - Sars is not an accurate model for Coronavirus impact: T. Rowe Price

Chris Kushlis, sovereign analyst, and Tomasz Wieladek, international economist, at T. Rowe Price have commented:

"Commentators seeking to understand the long‑term implications of Covid‑19 are frequently comparing it with the 2002-2003 Sars outbreak, which had a severe impact on both the Chinese and the global economy. However, the 2003 Sars outbreak coincided with slowing global GDP growth, the Iraq war and higher oil prices. So, is SARS really a good case study for understanding the likely economic effects of Covid‑19? And if it is not, what other evidence can we turn to?

"The Ssars outbreak caused 8,098 cases and 774 deaths in 17 countries. Although the first cases appeared as early as November 2002, it was not until April 2003 the World Health Organization issued a global health alert. Shortly afterwards, the Chinese authorities announced all primary and secondary schools would be closed for two weeks and closed down other public venues, such as theatres and discos. It was also in April 2003 the first quarantine measures were introduced. This coincided with a significant reduction in Chinese GDP growth for Q2 2003, in which the quarter‑on‑quarter growth rate fell by 2.1%. This decline was driven by a reduction in services and manufacturing growth, which was likely partly caused by containment measures taken by the Chinese government. Many observers, therefore, argue the Sars episode is a good case study to extrapolate the effects of Covid‑19.

"However, there are significant differences. Then, China composed only 5% of the world economy and was just in the process of becoming central to global supply chains on the back of its WTO accession in 2001. Rather than being a driver of the world economy, China was a recipient of fluctuations and shocks from elsewhere. Moreover, there were two important global economic developments occurring at the same time. Firstly, in early 2003, growth in G7 economies - 75% of global GDP at the time - was slowing. Second, in anticipation of the US invasion of Iraq, global oil production reduced by about 2%. The Q2 2003 Chinese slowdown is often wholly attributed to Sars, but is it possible these two macro factors may also have played a part?

"We used a simple linear regression analysis to determine the extent industrialised country growth and real oil price growth rates impacted Chinese GDP growth from Q1 2001 to Q4 2007. The residual weakness in growth, which can be attributed to China‑specific factors in that quarter, is 1% - much lower than the 2.1%.

"Overall, the coincidental global slowdown and rise in real oil prices mean the effect of Sars was likely greatly exaggerated in Chinese GDP data. In our view, Sars is therefore not a good case study for understanding the potential economic consequences of Covid‑19 on Chinese real GDP growth. So what should investors look at instead?

"We believe the most useful approach is to quantify the effect of lost working days on overall production. We estimate the current measures imposed by the Chinese government through early February have led to eight lost working days for the country as whole. A reduction in one working day in Q1 leads to roughly a 0.4% loss in output, meaning the eight lost working days so far translate into a quarterly growth reduction of 3.2%. This number is 50% larger than the 2.1% growth impact measured during the Sars outbreak, and three times as large as the estimated 1% impact adjusted for external factors. Although this number could rise further, it is significantly smaller than extrapolating the economic impact based on virus cases in China, which, with 78,000 cases to date, is 15 times larger than the 5,237 cases China experienced during Sars.

"We believe by looking at the sensitivity of growth to each working day lost, we can get a much better sense of the economic impact of Covid‑19 than can be obtained from arbitrarily scaling up the consequences of Sars. The same method can be applied to the impact of Covid-19 on growth in other countries badly hit by the virus, including Italy.

"We will continue to track high‑frequency indicators around travel patterns, pollution and coal consumption at power plants. This will help us more accurately gauge how many effective working days have been lost in real time and, therefore, what the economic impact is likely to be - and help us do so significantly ahead of the publication of longer‑term hard data."

 

28/02 1020 UMT - China small caps since Covid-19 outbreak

 John Tsai, portfolio manager at Eastspring Investments and Ken Wong, client portfolio manager and Asian Equity portfolio specialist, said:

"Small caps are likely outperforming due to a number of regulatory support measures that have been aimed at supporting SMEs amid the Covid-19 outbreak. In particular, we've seen targeted liquidity and credit support, targeted tax cuts, and targeted cost cuts. The most significant is probably the easing liquidity. A lot of liquidity has been injected into the system, and historically China A-shares, and in particular small and mid-caps, have tended to react more favourably to increased liquidity.  

"The small-cap outperformance could also be partly attributed to the fact that a lot of the stocks listed on the Shenzhen and ChiNext boards aren't available to offshore investors via StockConnect, and hence both markets are dominated by more speculative Mainland Chinese retail investors who are less valuation sensitive.

"There is clearly risk of a bubble given how Shenzhen, SME and ChiNext have rallied and are significantly more expensive compared to the underlying CSI300. That said, one supporting factor is the relatively higher earnings growth expectations for Shenzhen, SME and ChiNext.

"The risks of the coronavirus spreading further are clear - we are starting to see infections take off in Korea, Italy, Japan, and the Middle East. China's equity market seemed to have reacted to the initial scare but has bounced right back, while global markets seemed to have been complacent till earlier this week, but we are now starting to see other equity markets correct to reflect the growing risk. The bigger issue is how global supply chains will be impacted given how integrated the global economy has become over the past two decades. We should see some support for the markets given that this uncertainty over global growth will prompt central banks to respond with policy measures. The markets are increasingly pricing in Fed cuts in the coming months, and this should be supportive to risky assets at the margin.

"At Eastspring, we have not changed our positioning significantly since the outbreak. We had already been working on and investing in interesting names related to 5G, software, semiconductors, and healthcare, and we continue to look for upside by focusing on favourable fundamentals trading at reasonable valuations."

 

28/2 0930 UMT - Coronavirus and the market

Didier Saint-Georges, member of the Strategic Investment Committee at Carmignac commented: 

"In our opinion, the coronavirus crisis, which had the markets reeling for a few days, should be understood as a 'Black Swan'."

"The use of this metaphor is not to underline the severity of the crisis, but to keep in mind its unique nature which makes parallels with past cases and 'normal' statistics useless to risk analysis. The crisis needs to be analyzed based on the reliable data available, not on speculations about its future developments, which no one can forecast today with any accuracy. In that sense, it is of the same nature of past exogeneous shocks, such as the terrorist attacks in the US in 2001, the Sars virus in 2003 or the Fukushima accident in 2011."

"In all such cases, the damage to markets and the economy tends to be largely created not by the initial cause of the crisis but rather by the reactions to it, be it the measures of containment which hurt both consumer demand and, in a later stage, supply chains, or by psychological stress that hurts confidence, consumer demand and risk assets. A viral propagation presents a unique feature in that it tends to follow as such an exponential pell-shaped trajectory, meaning that it starts with an exponential acceleration of new cases, which then decelerates, plateaus, before going down and ultimately disappearing. In the present case, the trajectory of new infections is already in its descending phase within China but is, logically because of the time lag of propagation outside of the country, only starting now its acceleration phase outside of China. This explains why international markets first took the mostly Chinese crisis in their stride, with the support of still very accommodative monetary policies, and why now the internationalization phase of the propagation is sending waves of stress across global risk markets. These waves will last until their trajectory moves on to the deceleration phase.

"Economically, the immediate impact on global demand is likely to increase as the hit to consumer confidence widens to developed economies. Conversely, as China employees in manufacturing sector progressively go back to work, as they already do, the damage to supply chains will be getting a relief. Trying to time short term market gyrations is in our opinion a very unreliable way to manage portfolios at this juncture. It seems more appropriate to us to focus on two priorities: 

1) reduce overall risk exposure across asset classes to moderate levels. This will not totally prevent volatility from affecting daily NAVs of funds but will provide the most acceptable profile to all potential scenarios, and,

2) Ensure that equity assets held in the portfolios are very high medium-term conviction names, which we would be prepared to add to should strong opportunities arise. Given our view that policy makers, including in China, are unlikely to resort to massive reflation policies this year, these high conviction names remain growth stocks across the world, including emerging markets, with very strong visibility across economic cycles."

 

28/2 0900 UMT - How is the Coronavirus impacting the supply and demand for technology companies? 

Richard Clode, portfolio manager, Janus Henderson Global Technology Team, has commented:

"As technology investors we focus on long-term secular growth trends but as active managers we also dynamically assess all risks to our portfolios,  including the recent coronavirus outbreak. That risk has been more focused on China until the past week as rising concerns around a global pandemic have hit equity markets harder. Treasury yields hitting new lows would also point to rising concerns for global growth and the potential for a recession triggered by this emerging economic shock. 

"A point that we made about  the  US-China trade war concerns that also applies here is that China represents a relatively small percentage of global technology spending. For many large technology companies, notably in internet and software, China is a ‘de minimis' part of their end demand while they have no supply chain there to speak of either. 

"However, for other sub-sectors notably semiconductors and hardware, China is both an important part of some technology companies' end demand and supply chain. We are seeing  companies such as Apple prudently weaken  outlooks following the virus outbreak. . Our daily engagement with various technology companies provides us with live updates on the situation in China and we think the progress has so far been encouraging. After the delayed returned to work on the 10th of February following the Chinese New Year, most factories (excluding Wuhan) have reopened and labour is returning while raw material and finished good logistics have successfully restarted. It will take time for factories to reach optimal capacity and there is still the risk of a factory virus outbreak. But given we are currently in the low season of technology demand, supply chain disruption is likely to  be limited and manageable. 

"On the demand side there are more question marks as to how quickly things will recover, as well as  the Chinese government's potential stimulus policies to  support the economy. Major end markets like automotive and smartphones have been severely impacted while in e-commerce its intersection with the physical world and the need for offline delivery has led to significant declines there too. We have not seen order cuts to the supply chain yet but it would be prudent to assume that once companies have a firmer idea of demand, their supply chain capacity and channel inventory, they will likely adjust orders over the next couple of months. 

"We have not been adjusting our portfolios based on any temporary demand shocks and generally the portfolio has limited exposure to the areas mentioned above, given our focus on the  longer-term mega trends of internet transformation, next generation infrastructure, payment digitisation and AI. In some  cases the virus has even had a positive impact on technology, demand notably in online gaming due to the extended holidays and also in collaboration tools given many have been forced to work from home and cancel business travel. In both cases that will require more cloud infrastructure investment. Longer term we expect the coronavirus concerns will only accelerate the existing trend towards automating production given China's shrinking working population and wage inflation. 

"The situation outside of China remains much more fluid. A worst case scenario of a global pandemic would undoubtedly have a significant economic impact and given the fragile nature of the global economy could tip the world into recession. For now that remains a low probability outcome and our on the ground reports from an assortment of technology companies in China give us confidence that with the right measures in place the virus could potentially be contained. . Historically, these sort of virus outbreaks have had a  limited long-term impact on markets and companies. However, as custodians of client capital we  remain highly vigilant and will reassess our portfolio positioning when  appropriate." 

 

28/2 0830 UMT - Markets tumble

Neil Wilson, chief market analyst for Markets.com has published the following note:

"The FSTE 100 tumbled on the open as European bourses took the hospital pass from Wall Street and Asia. At 6,570 the FTSE 100 is looking to breach the Christmas 2018 lows at 6536. If this fails to hold then we are looking at the market trading at pre-Brexit referendum levels. 

"Global stocks have entered correction territory and it's now that we can start to consider the market is entering the period of peak fear. The market is crowding rapidly to price in the worst-case scenario, and I think now we can say the blood is running in the streets; the smart money will be looking at judiciously buying. The problem is that once fear takes over, a 10% correction can become a 20% bear market in no time, so if you are going in you need to be prepared to take a hit instantly. Whilst ~10% moves are normal during bull markets, what's been startling is the speed of the decline. Only a week ago we were at record highs - it's taken the S&P 500 just six sessions to go from all-time high to correction. Yesterday's 4.4% decline was the worst in nine years.

"It was a bloodbath on Wall Street yesterday and things are worse again today. The Dow dropped 1,200 pts - its worst points loss on record, and futures indicate a ~400pt decline today although the situation remains of course fluid. Asia has continued the bloodletting and we have the Nikkei, Hang Seng, Shanghai, Kospi and ASX all in correction territory too.

"Europe was down more than 3%. European shares will endure a torrid final day's trading of the month. Month-end rebalancing could help but as we have seen over the last fortnight, no one wants to hold risk over the weekend when the situation around the coronavirus is so uncertain. 

"On that front, the cue for the latest tumble seems to be California's decision to monitor over 8,000 people who could have the virus. Germany has put a town of 1,000 people in quarantine. Coronavirus has even made it to The Shire - New Zealand has reported its first case. 

"Bonds keep on rallying, sending US 10s to a new low yield of 1.22%. Markets are pricing more than 3 cuts by the Fed this year already - but even this is not offering any stabilisation. Some important technicals are being tested.The S&P 500 fell below its 200-day moving average for the first time since June 2019 as it tested the 3000 support zone and it headed under the critical 3000 area after hours. The Vix soared to 39, its highest since the 2011 flash crash. 

"Now we have seen a full blown correction you have to ask - does this deserve to go even lower? Does it warrant a 20% bear market decline? I don't see how it does - not without significant worsening in the expected path of cases/economic fallout, and I think that maybe 12-13% off the highs would be an appropriate point to consider a recovery starting to emerge, as that is the typical correction move in US equities post-war. But what I think the market should be doing and what it decides to do are two entirely different things - just because you think it should turn around because, says, the RSI is deeply oversold, or because valuations are compelling, doesn't mean it will. The problem in all this is we don't know the fundamentals anymore and we don't know how a market conditioned to go up will react to a more aggressive rise in cases in the US/Europe. 

"Oil is rolling over along with risk assets. WTI has taken a $45 handle. It's very hard to see what OPEC and allies can do about this. 600k of production cuts is not going to amount to a hill of beans against such massive demand destruction that could occur. OPEC will need to do more than they can agree to."