With equity markets delivering stellar performance during the course of 2019, on the back of concerted global monetary policy stimulus into a moderate economic slowdown, it was always inevitable that some event would make the market vulnerable. In this case, it was the emergence of the Coronavirus in China, leading to authorities there to essentially put 60 million people on lockdown in order to contain the spread of the virus.
The emergence of the virus coincided with the Chinese New Year, traditionally a time of much cross-country travel, and the timing could not have been worse. Following previous epidemiological viral spread models points to the peak of the infection being mid-March, and hence the uncertainty around the spread of the virus will most likely weigh on markets for a number of weeks.
Unfortunately for China, the lockdown has meant a complete halt to real economic activity, and will most likely lead to a plunge in economic indicators. Markets will expect Chinese authorities to provide whatever monetary and fiscal stimulus is required over the course of the next few months to kickstart activity again. However, on the back of global growth having already slowed in the runup to end-2019, we foresee that markets will be hesitant to extrapolate a return to the previous trend growth too early.
As it is, the Shanghai Composite Index (SSE Composite Index), plunged 10% in the space of two weeks, and the Emerging Market indices followed suit, albeit not to the same extent. For example, India’s NIFTY 50 Index lost only 4.5% over the course of January before recovering almost all of the losses.
The big positive movers though were in the safe havens – notably, the US dollar, US Treasuries, gold, and the Japanese yen. All of these saw substantial moves as worries about plunging economic activity fed into markets via capital seeking safety. Outside of those positive movers, the real losers were those indicators most closely linked to real economic activity – copper prices fell 13%, oil prices plunged 20%, and steel prices fell by 9%.
Key then for markets going forward will be the extent of the virus spread, the consequent knock to real activity and the level of stimulus (monetary and fiscal) that will be required to kickstart activity. On the back of reasonably high equity valuation levels, it can be expected that markets may well struggle to make serious gains in keeping with 2019 levels of performance. Prior to the virus concerns our performance expectations were already moderate for 2020, with global equity markets likely to deliver 8-10%. It is unlikely that those gains will be frontloaded into the early part of the year given the worries.
Of course, once those worries have abated, the trade war issues are likely to re-emerge, especially with the backdrop of the US Presidential elections awaiting us in late 2020. Added to this, Emerging Markets will also suffer from their links and leverage to China, and will struggle to make positive economic gains in the short term.
We reduced equity positioning on the back of the virus issues as we see substantial reductions in economic activity, centred around China and other Asia Pacific countries. Further to this, given their links to China, EM’s are also likely to see substantial knocks to their export-oriented economies.
We introduced a short on US healthcare as a way of reducing our overall equity positioning on the back of valuation concerns, as well as a policy hedge, with respect to the possible US Presidential elections outcomes. Due to EM risks, we reduced our weighing in EM Local Currency debt positions, shifting that exposure into Developed Market nominal bonds.
With global equity markets shaken by the Wuhan virus concerns, the only funds to show positive performance were those with a more defensive mandate - the Defensive Fund, managing to eke out a gain of 0.2%, and the Sterling Asset Management fund delivering a gain of 0.4% The other funds were down to a moderate extent, with the Global Growth Fund down 0.8% in the month.