Don’t Panic

Don’t panic Captain Mainwaring

The coronavirus outbreak is a reminder of how fragile life can be despite the massive strides made in healthcare in recent decades.

Without wanting to sound too alarmist, last week was a rather painful one for equity investors with a 10% correction being felt across the majority of major markets.

Having finished 2019 in a positive tone, coronavirus is not only causing widespread angst and health issues, but is having an adverse effect on the global economy and as a consequence, has created a seismic shock in financial markets. This will have a short-term, adverse impact on global economic growth. Whereas markets thought this would be a China specific issue in Q1, it now looks like a global problem continuing into Q2. It is more likely that coronavirus will drive more forceful central bank action to support global economic revival in the second half of 2020.

Global stock markets panicked last week and I can hear private Frazer shouting ’We’re doomed!’ Although, we feel this is not a time to panic. Coronavirus has created a significant seismic shock in the first half of 2020 but life will go on. However, coronavirus does present a fresh challenge which many investors will not have experienced before – containment, which adversely hits both consumer demand and global supply.

What have we been watching?

Coronavirus continues to impact markets severely. As we write this morning, global investors appear to be taking comfort from supportive comments from some central bankers.

As well as the sheer scale of last week’s declines in the UK, the other striking feature was the lack of discrimination across different sectors. The UK market fell by over 11% with Miners down by 13% and more defensive Utilities down by 8.5%. Globally, the ‘flight to safety’ was reflected in the US 10-year Treasury yield which hit an all-time low. In China the lockdown appears to be slowing the number of new coronavirus cases. However, even as the worst may be over for China, the number of cases outside China continues to grow. What was largely a Chinese issue has rapidly become a global one.

While northern Italy is the initial ‘hotspot’ in Europe, the virus has spread to the rest of the continent. Several European countries have announced their first coronavirus cases, with all appearing to be linked to the growing outbreak in Italy. Austria, Croatia, Greece and Switzerland confirmed cases involving people who had been to Italy. Germany’s health minister said the country is at the beginning of an epidemic. ‘The infection chains are partially no longer traceable and that is a new thing’.

Equally alarming perhaps is the outbreak in Iran which the US has accused of hiding the true scale of the outbreak. Iran’s deputy health minister, who has disputed case reporting, has himself been diagnosed with coronavirus.

It looks as if coronavirus has gone global. Having said this, the numbers are still small relative to the global population. The negative impact on stock markets, arises from the containment measures which are clearly having an adverse impact on travel, leisure activities and global supply chains. UK and US companies with activities linked to air travel and China are starting to flag the negative short-term trading impact from coronavirus and containment travel restrictions. Coronavirus is not Armageddon but it is creating uncertainty and markets hate uncertainty.

Encouragingly, Chair of the US Federal Reserve (Fed) Jerome Powell has said the Fed would ‘act as appropriate’ to mitigate the impact of coronavirus on the US economy. The Governor of the Bank of Japan, Haruhiko Kuroda, has echoed those remarks today. However, how should central banks respond? If consumers cannot go outside to shop or workers cannot get to factories due to containment measures, then they may have to follow China’s example and maintain a flow of credit for companies facing cash flow constraints.

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In the UK, financial media reported that due to coronavirus uncertainty the new Chancellor could delay some of the government’s infrastructure plans and fiscal stimulus.

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In Europe, some economic analysts have already cut their Eurozone economic growth forecasts for 2020 from 1% to 0.5% due to coronavirus. Containment measures are expected to affect demand and supply in the two largest manufacturing economies, Italy and Germany, with both likely to suffer a technical recession in the first and second quarter of 2020.

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In China, the importance President Xi Jinping places on the battle against coronavirus was reflected in the postponement of the most important political meeting of the year, The National People’s Congress. However, President Xi Jinping has said that factories in areas of low risk of infection should re-open and the government will pay for transport to help employees to return to work. In Hong Kong, 7 million residents are to be given a cash gift of $1,200 to boost consumer spending and ease the financial burden from coronavirus. Chinese economic growth forecasts for the first quarter of 2020 had been cut from 6% to 4.5% on the first news of the coronavirus outbreak but have since been reduced further to 3.5%. China’s manufacturing PMI activity indicator collapsed from a reading of 50 to 35.7 with business sentiment slumping to its lowest level in the history of the survey. An outright contraction in China’s economy in the first quarter appears increasingly likely.

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Brent oil dropped to $51.5, some 20% below the level at the start of the year on concerns about the impact of coronavirus on economic global growth and oil demand. OPEC+ is due to meet to discuss the ongoing production cut agreement. Saudi Arabia is reported to want a further 600,000 barrels a day cut but Russia is unwilling to support the deal.

 

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Alpha Portfolio Management is a trading name of R C Brown Investment Management PLC which is authorised and regulated by the Financial Conduct Authority.