Capital Markets Update
- In a nutshell
- Coronavirus escalates
- Strong US earnings season
- Economic data a mixed bag
In a nutshell
February saw risk appetite materially deteriorate as investors grappled with an escalation of the coronavirus outside of China. On a regional basis, (in GBP Sterling terms), all major regional equity indexes posted negative returns. Asia ex-Japan equities held up best, owing to signs that China’s efforts at quarantining have been successful at containing the virus. UK equities lagged, due to their higher exposure to energy and mining. Yields plunged as investors fled to safe- haven government bonds, compounded by the expectation of future central bank rate cuts.
Hopes that the coronavirus would be contained within China were dashed in February, as all major economies reported a significant rise in new cases. South Korea and Italy in particularly experienced a sharp rise in the number of people infected. The mortality rate appears to be less than other coronavirus strains (MERS and SARS), although the true mortality rate is hard to estimate given the incompleteness of testing. The bigger issue appears to be level of contagiousness, that appears to be far worse than other viruses, which makes the task for governments and health departments very challenging.
Whilst we cannot claim to have foresight on how the coronavirus will escalate from here, we are encouraged that the Chinese government appears to have made some progress with quarantining and reducing the rate of growth internally. However, the fact that governments outside of China have less control means that it will be unlikely that they can replicate their success. Therefore, we believe an element of caution is still warranted on this issue. From here, it will take a coordinated effort between public health, monetary and fiscal policy to effectively combat the issue.
Strong US earnings season
February brought the conclusion to the US fourth-quarter 2019 earnings season. 71% of companies beat earnings estimates, with analysts now suggesting an aggregate Q4 earnings annual rate of 2.5% growth. This marks a welcome reversal from the 0.3% decline witnessed at the beginning of the year. The technology sector had some particularly strong earnings and revenue growth, which drove the Nasdaq 100 higher at the start of February.
Whilst we are encouraged by the strength of the fourth-quarter results, we believe these results should be taken with a pinch of salt given the likely disruption to future earnings from the coronavirus outbreak.
Economic data a mixed bag
On the positive side, the US consumer, the engine of the global economy, has remained in rude health, driven by a number of factors. A strong labour market is one factor, that is seeing continued job gains, and rising wages. The US consumer is also bolstered by a healthy housing sector, as housing starts and building permits beat expectations in February, fuelled by low mortgage rates. Global services data across the world also remains encouraging, evidenced through the January purchasing managers indices (PMIs), an important business survey. However, the manufacturing segment of the global economy continues to look sluggish. In the US, industrial production continues to decline, partially driven by the impact of the Boeing 737 Max grounding. In the Eurozone, manufacturing PMIs remain below 50 (although Germany’s is showing some stabilisation at least). Crucially though, most of the hard data released in February was backward looking and not accounting for the impact of the coronavirus. Whilst it will take time to evaluate the full economic impact, there is evidence from the soft data that business sentiment is already starting to sour, seen in the flash PMIs released in February.
Multi manager team views
It is disappointing that just as the global economy seemed to be turning a corner, it looks like the coronavirus will provide a new roadblock. Central banks had previously demonstrated that they were prepared to use their monetary muscle to keep the global economy afloat, and we expect they will do so again. This time there will likely be the need for fiscal stimulus also, which China is already beginning to commit, and we expect Western governments to follow suit. Public health policy has to improve, to try to contain the spread of the virus. We expect there to be a hit to global economic activity over the coming months, but the extent remains unknown.
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