12 February 2020
By Ken Rayner, Verbatim Model Portfolio Manager
In a complex world dominated by short-term news flow and ‘noise’, investors can easily be overcome with information and commentary, some of which might be ill-informed and over-complicated. We’ve always believed that the merits of simplicity are under-rated and that asset markets are driven by just three factors – fundamentals (economic and political/geopolitical), valuation and sentiment. There’s now another factor to consider, an exogenous shock emanating from China, with the threat of the Coronavirus.
The Coronavirus has come from China but previous analysis of other global epidemics such as Sars, Swine Flu, Ebola and Zika viruses show common reactions. In market terms, there is typically an initial sell off during the early days of an epidemic as investors are uncertain how badly economic growth will be affected. The threat is considerable with the ECB seeing the virus as the main risk to growth this year in Europe.
he outcome for the global economy is uncertain as the virus is still spreading. Chinese growth numbers are likely to be hit in the first quarter and other economies will no doubt follow. The cut in tariffs in February between the US and China should help but even if the outbreak is contained, it will take time for China to readjust.
In China, there has already been a significant effect on consumption. The property market (which makes up 25% of the economy) has been hit hard due to the drastic reduction in travel and business in Hubai province and beyond. The problem for the regime is that the outbreak was not shut down in the early stages, allowing it to spread outside of the quarantined region. The Chinese government is now under pressure to recover control and is pushing resources to achieve this. Final implications are difficult to predict but global growth will be affected.
Previous crises of this kind were Sars (November 2002 – July 2003), Swine Flu (March 2009 – August 2010), Ebola (December 2013 – June 2016) and Zika virus (March 2015 – November 2016). In each of these events, a sharp initial stock market declines quickly gave way to recovery. During the Sars outbreak, luxury, leisure and travel saw the biggest losses and the Chinese stock market initially fell but then rebounded by more than 30% in the three months after April 2003.
History shows that the more equities fall initially, the more they subsequently re-bound and this type of event has historically been a buying opportunity rather than a sign that investors should exit stocks. If it continues to develop & spread across the world’s second largest economy, the global economy could be tipped into recession, but significant resource is being applied to reduce the spread and threat of the virus. Stock markets have shown resilience to these events in the recent past and even though markets have been dominated on a day to day basis by short term news flow and what is often called ‘market noise’, the medium-term direction of asset markets will continue to be driven by the three factors of fundamentals, valuation and sentiment. The macroeconomic fundamentals point to the persistence of a ‘goldilocks’ (not too hot, not too cold) economic climate, with the greatest risks of a bear market in 2020 resting on these ‘exogenous events’.
Overall, investors are likely to continue to be rewarded for taking equity exposure in 2020, although after a long bull market, any setbacks are likely to be swift and sharp with heightened volatility.
This is intended for investment professionals and should not be relied upon by private investors or any other persons. Past performance is not a guide to future performance. The value of investments and any income from them can fall as well as rise, is not guaranteed and your clients may get back less that they invest.
The value of investments and any income from them can go down as well as up and is not guaranteed. Your clients could get back less than they originally invested. Past performance is not a guide to future performance. The portfolios' investments are subject to normal fluctuations and other risks inherent when investing in securities. Verbatim Asset Management has taken due care and attention in preparing this document, which is solely for the use of professional advisers. Verbatim cannot be held responsible for any inaccuracies arising out of information detailed within and will not accept liability for any loss arising out of or in connection with its use. This article is for information only and should not be deemed as advice.
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