Markets and key events

Investors turn to panic, as equities fall by more than 10%

Equity markets suffered from a severe change in investor confidence this week, as concerns about the economic impact of the coronavirus (nCoV) escalated, as did the number of infections outside of China. Despite the number of infections reaching a turning point in the centre of the epidemic in Wuhan, China, where more patients are now leaving hospital than arriving, the number of cases outside of China has increased. Iran recorded 61 infections, with 12 deaths; Italy confirmed 229 infections and 6 deaths, whilst South Korea reported 231 new cases, bringing the total number to 833. Turkey closed its borders with Iran, while Iraq, Afghanistan, Armenia and Pakistan imposed border crossing restrictions. Norway and Pakistan also announced their first cases. In total, over 82,000 have been infected globally to date.

Equities record their steepest losses since the financial crisis of 2008/09

Equity markets recorded their worst losses since the 2008/09 financial crisis, with many entering correction territory, which is defined as a fall of 10%. As of 12pm GMT on Friday, over the week US equities fell 10.8%, European equities lost 12.0%, UK equities dropped 11.2%, Japanese equities fell 9.7% and Australian equities dropped 9.8%. Perhaps surprisingly, emerging markets have proven to be relatively resilient, having lost 6.1% over the week and Asian Pacific equities ex Japan having fallen 4.5%. Hong Kong and domestic Chinese stocks are down 4.3% and 5.2% respectively.

US Treasury yields fall to historic lows

Haven assets, such as government bonds, have rallied, with the yield on 10-year US Treasuries now at a historic low (yields move inversely to price) of 1.19%. 10-year German bunds are yielding minus 0.60%, and UK Gilts 0.43%. The Japanese Yen, often viewed as a haven currency, rallied versus other developed market currencies, and is now trading at Yen108.6 to the dollar, an increase of 2.7% over the week. Gold on the other hand, fell 1% over the week, now trading at $1,632 an ounce. In periods of extreme stress, gold is a very liquid asset and is often sold for cash to fund margin calls by hedge funds, nonetheless, relatively it has been a safe place for investors to hide.

Corporate bonds, despite increased fears of economic damage, have benefitted from the fall in government bond yields, particularly investment grade credit, recording a positive return over the week.

Within industrial commodity markets, crude oil has taken some of the worst pain, with Brent crude having fallen by 12.7% over the week, now trading at $51.1 a barrel, and US WTI (West Texas Intermediate) having fallen by 14.5%, now trading at $45.7 a barrel.

Issues under discussion

As the coronavirus spreads around the world, causing panic in financial markets, we as investors need to consider its impact dispassionately. Although the number of new cases is now coming down in China, investors are concerned that few countries have the ability to quarantine whole cities to the same extent. As increasing numbers of people are asked to work from home, or quarantine themselves, there is no doubt the nCoV will increasingly have a negative impact on economies. Industries such as tourism, travel and supply chains are in the eye of the storm, but the impact is likely to be felt much wider. There is no doubt that the economic impact will be significant, with some pretty dreadful numbers likely to be reported in the weeks to come. However, whether it causes a recession (defined as two quarters of negative growth) is another matter.

It remains the case that most recessions are caused by central banks tightening interest rates, whilst we are likely to witness the polar opposite. Two days ago, futures markets were pricing in a 35% probability of an interest rate cut at the next US Federal Reserve meeting on 18th March; today they are pricing in a 100% probability, with the magnitude of the cut the only preponderance, with markets pricing in US rates of 1% by year end.

Whilst it is only really the US that has the fire power to cut rates in the developed world, we increasingly expect to see fiscal stimulus elsewhere, particularly in the UK, and on a piecemeal basis across European counties as well. Within the emerging world, there is much greater scope for interest rate cuts, and any weakening in the US dollar, such that we might expect from rate cuts, would be helpful too.

Historically, other viruses have displayed seasonality, i.e. they are virulent in the winter months and die down in the summer months. Whilst we cannot categorically say this is true for nCoV today, there is every reason to suspect a similar pattern. Additionally, so far, the virus has not mutated, meaning that when/if a vaccine is discovered, it should prove to be effective. On Wednesday of this week, Hans Kluge, the European director of the World Health Organisation (WHO) said “there is no need for a panic”, “bear in mind that four out of five patients have mild symptoms and recover”.

As grim as the statistics are to date, we should not lose sight that according to the WHO, just over 82,000 cases of nCoV have been confirmed, across 39 countries, resulting in just over 2,800 deaths. Seasonal flu in the US alone infects between 24 to 45 million people each year, resulting in 23,000 to 61,000 deaths. However, that is not to downplay this epidemic, which has a fatality rate of 3.4% versus around 0.1% for flu.

Like everyone else, we never foresaw this event, however, the little comfort we will take are that the defensive positions we added last year have fared well over this period. Whilst many markets appear oversold and due a bounce, we are remaining cautious for the moment, believing patience is key as this event unfolds.

The information provided above is for Professional Advisers: All data has been sourced from Lipper. Any investment must be made in conjunction with reading the relevant KIID or Investment Mandate. Clients should be aware that the value of investments and the income from the may fall as well as rise and they may not get back the amount originally invested. Investors should note that the views expressed and information given were current at the time of publication but may no longer be so and/or may have been acted upon by the Investment Manager already. Source SmartIM