Coordinated global response to the rescue

Investors worry over recession risk and global supply chains

Last week was the worst single week for markets since 2008. The MSCI World index of global equities lost over 9%, with big falls in US, European and UK stocks.

As the infection has spread out of China and the death toll has risen, there is widespread concern about the medium-term impact that the epidemic will have on the global economy. Fears centre on global supply chains and a potential global recession. China is a point on the path of many manufactured goods, and stock market behemoths like Apple rely heavily on Chinese producers. Other regions – notably Europe – benefit from Chinese manufacturers’ appetite for plant and tools. The knock-on effect on the global economy of Chinese measures to stem the outbreak has raised recession risk.

A tentative recovery in markets

Monday saw the FTSE 100, Euro Stoxx 50 and S&P 500 all show gains. We think there’s a potential reflex rally coming at some stage, which could see markets bounce back based on the coordinated policy response being suggested by central banks in the last few days.

The big falls we saw last week mean that a fair amount of any bad news that lies ahead has already been taken into account by markets. In the meantime, low interest rates and large amounts of liquidity in markets reduces the likelihood of an extended market downturn.

But it’s too early to sound the all-clear yet. A ‘V-shaped’ recovery in markets would be unusual in our view – choppiness and volatility are likely to continue throughout March and markets could test recent lows as new information – medical or economic – gradually emerges.

Governments and central banks step in

Over the last few days we have seen the beginnings of action from central banks and policy makers to address the problems created by the outbreak:

• The Bank of England has stated it will do all it can to support the UK economy from the economic effects of the virus, including the possibility of rate cuts
• The Bank of Japan has pledged its commitment to maintaining market liquidity and stability – on Monday it considerably increased its regular stock market purchases and bought ¥100 billion of exchange traded funds
• Finance ministers and central bankers of the G7 major economies will discuss the best approach by phone this week 

We expect to see more announcements in the coming weeks.

Central banks and governments will be looking to boost economies, stabilise consumer confidence and ensure the smooth running of credit markets, all of which will offer comfort to investors. As well as the policy specifics, the image of the world working together to combat the economic impacts of the pandemic are likely to have a powerful effect on investor appetite.

Looking for opportunities

While we’re paying close attention to the unfolding events, we are focused on our long-term view. Our investment process means that we are continuously assessing new data as it comes out on a daily basis and we are actively reviewing our house view in response.