A raft of new coronavirus cases in numerous countries outside China over the weekend has ignited fresh concern about the ability of the illness to spread and its potential economic impact.
European shares plunged 3.7% as of 11:12 a.m. in London after Italy’s government imposed a lockdown on an area of 50,000 people near Milan and took other measures as infections there exceeded 130. South Korea’s Kospi tumbled 3.9% after the number of cases in the country surged and the government raised its infectious-disease alert to the highest level. Iran reported an eighth death.
That’s all on top of the impact in China, where millions of firms face potential collapse if banks don’t act. After meeting on Friday, the nation’s leaders said they will exercise more flexibility in monetary and fiscal policy.
Here’s what market players are saying about the latest developments:
Hello TINA
“The key risk you’re facing is that this coronavirus now via a lot of these unwanted disruptions will actually lead to negative earnings growth and that will potentially scare investors considering where valuations are,” Christian Mueller-Glissman, managing director of asset allocation at Goldman Sachs Group Inc., said in an interview with Bloomberg TV. “Lower yields obviously make you want to own even more risky assets -- like we always call it TINA, there is no alternative -- so you have people being forced to own something in equities. Secular growth stocks are trading at one of the highest valuation premia in history. The problem is some of those are also exposed to these supply-chain disruptions, think about the big FAANG names. As a result of that we think that this in the near-term will potentially create volatility in them as well. So there’s nothing really completely safe.”
A Shallow V
“It is difficult to evaluate the impact thus far. High frequency data show very little to no pick-up in activity so far. There may be a risk that a V-shaped recovery of Chinese growth turns out to be shallower than many currently assume,” HSBC Bank Plc strategists led by Max Kettner wrote in a note. “Stick to underweight in equities but close underweight in HY; remain overweight in IG credit and government bonds. Equities seem to have escaped ‘the bad news is bad’ paradigm. Other cyclical assets such as FX or commodities have priced growth risks more appropriately. Equities have also outperformed quite substantially vs HY lately and the global ERP has shrunk. We therefore prefer adding to HY than to equities. We remain cautious on EM asset classes and overweight gold and government bonds.”
Normal by July
“More near-term panic will weigh on risk, but panic is necessary to increase containment odds. Credit markets appear to recognize that,” said Dennis DeBusschere of Evercore ISI. “EISI’s Survey team asked investors about the impact of the outbreak and the vast majority of respondents see both the risks as understated and expect U.S. Treasury yields were likely to decline by 25 basis points (to about 1.3%). 80% of investors expect supply chains to return to near-normal by July though.” (The survey was published on Feb. 17.)
Hard to Pick Bottom
“With cases of COVID-19 still rising, it is hard to tell when manufacturing will bottom, potentially setting the stage for prolonged weakness,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank Ltd. in Singapore. “This means that we’re going to see the juxtaposition of more safe-haven demand.”