How Strategists and Investors See Coronavirus Playing Out
(Bloomberg) -- 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.
Here’s what market players are saying about the latest developments:
“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.”
“U.S. real rates have plummeted during the virus scare, with 10y TIPS yields -- already quite low at just 6.5 basis points above zero on January 17 -- are today more than 15 basis points below zero,” and John Velis, FX and macro strategist at BNY Mellon. “Since gold tends to trade inversely to real rates, the rally in gold will probably persist as long as the latter stay under pressure.”
‘Intense’ Hunt for Yield
“We have been advocating a more balanced position between bonds and equities in recent weeks since we have little clarity on how the outbreak would evolve. It seems like that the number of new cases in China is coming down, with the daily number of recovered patients higher than the new confirmed cases. This may encourage the Chinese authorities to permit more workers to return to work and limit disruption to production,” said Tai Hui, chief market strategist for Asia at JPMorgan Asset Management. “The decline in bond yields also meant investors’ search for yield will remain intense. This underpins our constructive view on EM fixed income and developed market corporate debt.”
“Risk aversion is likely to intensify over the near term given the sharp rise in cases in Korea, Italy and elsewhere,” said Mitul Kotecha, senior emerging markets strategist at TD Securities in Singapore. “Markets are becoming increasingly focused on the risk of more prolonged economic damage than had been previously expected. Supply chains are becoming increasingly exposed, while services and tourism are suffering across many countries.”
“Policymakers are trying to get the economy going again but we think weakness is likely to persist well into the fourth quarter,” said Win Thin, global head of currency strategy at Brown Brothers Harriman, of China. “Stimulus is in the pipeline but it won’t be enough to totally offset the growing impact of the virus.”
Asymmetric Dollar Strength
“U.S. dollar strength will likely be asymmetric,” said Citigroup Global Markets Asia-Pacific chief economist Johanna Chua. “Given the low cost of capital globally and comforting commitments from authorities to render further support, high yielding emerging-market FX (Indian rupee, Philippine peso) may not hurt as much and is likely to outperform the low yielding EM FX especially in Asia, where the Singapore dollar, Thai baht, Korean won etc. are also the most impacted on economic activity -- and hurt on their current accounts. In spite of being a high yield FX, the Indonesian rupiah may have some more unwind of stretched long positioning before settling down.”
“We view this as headline risk. Our base case view is that coronavirus continues to represent demand delayed and not demand destroyed,” said Steve Chiavarone, a portfolio manager with Federated Investors.
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