Two things in particular make it a tough ask – the speed with which the virus is spreading, and the unknowns that come with any new disease, especially its longevity.
That said, it’s important for investors to stay focused on the bigger picture because in the long-term market context, this is not the first health crisis that financial markets have endured. As difficult as it may be, investors shouldn’t overreact to the often distressing news headlines.
Virus spread in a globalised world
The recent spread of the virus outside of China has led to concerns that the full economic impact of the virus might have been underestimated. It is clear that global growth will be affected by these events in the near term and whilst various trials for a vaccine are underway, we’re unlikely to see results before April.
At the start of this year, even without the virus emerging, we thought there would be some profit-taking in the quarter following the highs of December 2019. We therefore held back from adding to equities despite the favourable fundamental backdrop. In some ways, the general consolidation phase that we’re now witnessing, could be viewed by investors as being something of a reality check after the steep rally since October.
As for the rally in equity markets at the beginning of this month, it was largely driven by a selective number of (mostly Tech) stocks which we see as a negative and which is different to the broad-based rally we saw at the tail end of last year.
Wider investor context
Despite the virus picking up momentum, there hasn’t so far been a significant impact on economic activity outside of China.
Latest data released last week suggests that Japan’s manufacturing sector has taken a hit, but that’s currently not the case for the other major economies. And in fact, UK and Eurozone manufacturing activity indicators rose in February.
That said, there’s no denying that economic activity in the first quarter of 2020 will be affected by this outbreak. Sven Balzer, Head of Investment Strategy, says: “It’s a consequence of having globally-connected markets and supply chains, making isolation of problems more difficult than before. We shouldn’t be surprised to see pockets of volatility in the weeks ahead. Against the backdrop of a deteriorating economy, the Chinese authorities are likely to launch new stimulus measures such as interest rate cuts and tax cuts. In developed countries there is a growing concern about supply chain disruptions however fundamentals remain stable; low bond yields and accommodative central banks should help to overcome short-term economic headwinds."