Coronavirus halts liquidity-driven equity bull market for now. A negative demand and supply shock looms
U.S. equities in particular were highly valued and technically overbought before the "corona virus correction". The persistence of overvaluation makes stocks vulnerable to a correction even if the Corona virus is brought under control.
Were too many advance praises handed out?
The stock markets got off to a flying start in the new year. Almost all forecasts for 2020 assume that the bull market will continue at a "reasonable pace" and that the global economy will recover slightly. With the strong price advances of recent months, it is highly likely that too much advance praise has already been distributed.
Asset prices driven by central bank liquidity
Central bank policy has failed to produce consumer price inflation on a significant scale. Instead, asset price inflation has been fueled again. However, last year's price increases have so far not been underpinned by corresponding increases in corporate profits.
US equities clearly technically overbought ahead of "viral correction
Before the correction of the last few days, U.S. stocks in particular were technically heavily overbought, and investors' fear of missing out was correspondingly high.
Corona virus outbreak
"There is always the unexpected" (quote from Bridge on the River Kwai). Presumably, shares would have been driven up further in the short term by the central banks' liquidity creation if a new coronavirus had not broken out in China. Nobody had expected that!
Large parts of China are in a state of emergency
The further spread of the coronavirus and the medium-term (economic and human) consequences are almost impossible to predict.
Short-term real economic damage considerable
As a rule, planned economic systems are characterized by euphemistic communication. In most cases, unpleasant truths are concealed until it is no longer possible. All official information should be taken with special caution.
China is currently trying to seal off around 50 million people by stopping public transport and overland traffic as far as possible. With a population of 1.4 billion, this means that around 3.6% of China's population is affected.
An increasing number of infected and dead can be expected in the coming days, perhaps weeks. The short-term damage to the economy is concentrated in the transport and tourism sectors, and global air traffic in particular is negatively affected. Sporting events will be canceled. As people will avoid coming into contact with others, retail sales in the affected regions, airports and tourism hotspots (Lucerne will also be affected), will also drop significantly. In 2003, the International Air Transport Association (IATA) described the fiscal year as "the most difficult year in the history of aviation" due to the SARS lung virus. The immediate damage was put at around 10 billion U.S. dollars. With "only" 1,000 deaths, SARS was contained relatively quickly at the time.
China seeks to combat spread of coronavirus through travel bans
It is unclear whether a similarly rapid containment can be achieved. In principle, disease spread can be calculated if the following parameters could be reliably estimated: Probability of infection in case of contact, number of contacts during the time one is contagious, probability of death, immunization & survival. All data are currently unknown or can only be estimated very roughly. The impact of isolation / compartmentalization measures is also difficult to estimate. Even if China has optimized Orwellian surveillance technologies, a hundred percent isolation of regions and large cities cannot succeed. It is unknown how quickly a vaccine and effective drugs can be developed. At least it is encouraging that up to the time of going to press no deaths have occurred outside China. With 106 deaths and 4,515 infected, an estimate for the subthreshold mortality rate is about 2.3%, since it is not yet known how many of the 4,515 will survive in the coming months. We also do not know how quickly the virus will mutate and how dangerous these mutations will be.
China closes selected production sites...
There is a risk of infection in all crowds, including at work. China has ordered that the manufacturing center Suzhou, where some of the largest manufacturing cities in the world are located, and among other things parts for the iPhone and products for Samsung or also Johnson & Johnson are manufactured, is "closed" for at least 1 week.
... which represents a negative supply shock
Thus, the Corona shock is not only a negative demand shock, but also a negative supply shock. Many Chinese workers cannot work and they do not consume, as they will probably only buy the essentials. The contagion risks in shopping malls and restaurants are simply too great at present.
What would be the all-clear signs?
Signs that the viral disease is not fatal in the majority of cases in younger, healthy people would be strong "all-clear" signs. Signs that the growth rate of the disease cases is decreasing would also be very positive, as this would mean that the isolation measures are successful. The next few days will provide more clarity here.
Tentative signs that the worst of the "industrial recession" is over
Let's ignore the corona virus for a moment and turn to the economic indicators. Here, there is reason for cautious optimism that there are signs of a slight recovery in global value added in the manufacturing industries, not least in Japan.
Japanese purchasing managers' indices recover
The purchasing managers' index for manufacturing rose from 48.4 to 49.3, while the index for services improved markedly from 49.4 to 52.1. The overall index rose from 48.6 to 51.1 and is now comfortably in growth territory.
Investment Recommendation:
We maintain our view to slightly underweight equities. We maintain our positive view on gold. There is no need to panic, but we are holding off on increasing the equity weighting.
Contact: Thomas Härter, CIO, Investment Office
Telephone: +41 58 680 60 44
Disclaimer: Information and opinions contained in this document are gathered and derived from sources which we believe to be reliable. However, we can offer no undertaking, representation or guarantee, either expressly or implicitly, as to the reliability, completeness or correctness of these sources and the information provided. 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 transaction. 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.
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.
