The world is now held captive to the coronavirus, paralyzing entire economies. On a worldwide basis stock markets have fallen by over 30%. While valuations are now considerably more attractive, we stay underweight in our allocation to equities and prefer defensive sectors.
China on the way to normalization
China seems to be slowly recovering from the corona crisis. Her drastic isolation measures appear to have worked. For the second day in a row, the metropolis of Wuhan has reported only one new infection. 14 of the 16 temporary hospitals have already been dismantled, schools are reopening, and various companies are slowly increasing their output. The iPhone supplier Foxconn expects production to be running at full speed again by the end of March. Employees are being supported with bonuses, free shuttle buses, food and accommodation. 2020 growth forecasts for China’s economy have already been significantly reduced and now range from slightly negative to 3 percent growth.
In the meantime, the virus has reached Europe and the US, paralyzing entire regions and industries, especially in Europe. Volkswagen, for example, will close its factories in in Europe for two to three weeks. But in Italy we may soon be at a turning point, although it is still too early to give the “all-clear”. In the last four days the number of reported new infections there has remained much the same (around 3,500 cases a day). That said, the fact that over the last two weekends around 50,000 Italians have returned from the North to their homes in the South could be bad news as it could imply new chains of infection. It is already clear that economic growth in Europe, and also in the USA, will be hard hit, especially in the first half of the year. 2020 GDP growth in the USA as well as Europe is expected to be negative. These forecasts are based on the assumption that the virus will soon be brought under control and that above-average growth in the third and fourth quarters of 2020 will compensate for some of the losses in the first half.
Central banks react
Although the ECB has (for the time being) refrained from cutting interest rates, the central bank will, on top of the last week announced bond purchases, invest another 750 billion euros in bonds by the end of the year and is offering banks extremely favourable financing conditions. The Fed has reduced interest rates in two steps to the new range of 0% – 0.25% and will inflate its balance sheet by a further USD 700 billion. This week, the Fed announced additional measures including the purchase of short-dated bonds from US companies – a measure previously resorted to during the financial crisis. Politicians around the world have been announcing programs of economic stimulus and aid. At present, these amount to about 1% of world GDP. During the 2008/2009 financial crisis, global fiscal stimulus amounted to some 3.5% of world GDP, so further measures of stimulus are likely to follow this time.
Stock markets remain volatile
Stock markets remain extremely volatile, and we expect a succession of brief up-moves followed by renewed setbacks. Since its peak, the MSCI World has lost over 30%. The corona virus has clearly pushed the S&P 500 index into the fastest bear market (a decline of 20%) in its history. As a result, equity valuations are more attractive than they have been in a long time and seem now to be pricing in a mild recession this year followed by stronger growth in 2021.
Stock markets remain extremely volatile, and we expect a succession of brief up-moves followed by renewed setbacks. Since its peak, the MSCI World has lost over 30%. The corona virus has clearly pushed the S&P 500 index into the fastest bear market (a decline of 20%) in its history. As a result, equity valuations are more attractive than they have been in a long time and seem now to be pricing in a mild recession this year followed by stronger growth in 2021. Various technical and sentiment indicators (relative strength, implied volatility, put/call ratio, etc.) have now reached 2008 levels of bearishness. But outflows from equities have not yet been quite as dramatic as during the financial crisis.
(A similar capitulation to 2008 could trigger an anticyclical buy-signal.) Right now, US corporate refinancing markets are malfunctioning, something which has led to a fall in prices in all asset classes, with correlations between individual investments at times tending towards “one” at the end of last week, a clear sign of market malfunction. Put simply: everything was being sold. The steps the Fed has now taken are primarily aimed at reducing these tensions. While positive results can already be seen, these steps will most likely be expanded in order to eliminate distortions and restore the ability of markets to function.
Waiting for more clarity
We recommend investors to wait with further share purchases und remain underweight in their equity allocation. Many forecasts are based on an early “containment” of the virus. These will have to be revised downwards if the crisis looks like becoming more extended. In particular, the uncertain course of the virus in the US makes us cautious. It is also too early to quantify the effective impact on consumer sentiment. In recent years, private consumption has been the main driver of US economic growth. In terms of sectors, we continue to underweight the consumer discretionary sector and to prefer the healthcare sector. If there is a clear turnaround in contagion rates there could be a recovery rally.
It is certainly interesting to note that Partners Group, a global investment manager in private markets, has decided to bring forward its share buyback program in order to benefit from the “currently low valuation” of its shares. In the long term, the actions of the central banks (liquidity injection, purchase programs) will further increase the attractiveness of “real” assets (shares, gold, real estate) compared to “nominal” assets (cash and bonds). This argues for a continuing strategic commitment to equities in the asset allocation. The liquidity now being pumped into the system will stay there and, as in the past, will generate “asset inflation
Contact: Nicolas Peter, Head Investments
Telephone: +41 58 680 60 42
Disclaimer: Produced by Investment Center Aquila Ltd. Information and opinions contained in this document are gathered and derived from sources which we believe to be reliable. However, we can offer no under-taking, representation or guarantee, either expressly or implicitly, as to the reliability, completeness or correctness of these sources and the information pro-vided. All information is provided without any guarantees and without any explicit or tacit warranties. Information and opinions contained in this document are for information purposes only and shall not be construed as an offer, recommendation or solicitation to acquire or dispose of any investment instrument or to engage in any other trans action. Interested investors are strongly advised to consult with their Investment Adviser prior to taking any investment decision on the basis of this document in order to discuss and take into account their investment goals, financial situation, individual needs and constraints, risk profile and other information. We accept no liability for the accuracy, correctness and completeness of the information and opinions provided. To the extent permitted by law, we exclude all liability for direct, indirect or consequential damages, including loss of profit, arising from the published information.
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