Short and Sharp: Have markets developed immunity to the coronavirus?


Seema Shah

Principal Global Investors Chief Strategist, Seema Shah addresses the ongoing impact of coronavirus.

“2020 to date has been no stranger to sharp sell offs, followed quickly by big rebounds. In an environment where the pace at which tail-risks can affect asset prices is elevated and where there is still plenty of angst, surrounding not just the coronavirus but other concerns such as the U.S. election, this could be the pattern for the foreseeable future,” wrote Ms Shah.

“Initially, the market’s response to coronavirus fears was more violent than its reaction to the 2003 SARS episode.”

Ms Shah attributes this first reaction to the heightened risk velocity – the pace at which major risks and “black swan” events can affect asset prices – seen in today’s markets.

This elevation has been driven by three key factors – the first being that social media has created an echo chamber for market anxiety, the second that the potential for global impact is higher as global supply chains have proliferated in their size and complexity, and the third that asset valuations are extremely elevated.

Equities “unstoppable” despite coronavirus

“Equities look unstoppable,” said Ms Shah. She noted that, “Just two weeks after the coronavirus outbreak first hit markets, Chinese equities have already reversed some of its losses and the S&P 500 index has hit new heights. All this even as the number of virus cases continues to climb.”

She called out key factors helping this rise, “no doubt, markets have been helped along by China’s halving of trade tariffs” and “the reassurance provided by the People’s Bank of China (PBOC) decision to inject additional liquidity into the financial system”.

Ms Shah added that “strong corporate earnings reports have also helped propel equities higher”.

China in the near-term

“Investors are already asking if this is a good time to increase exposure to Asian risk assets, hoping to position for a repeat of the sharp rebound enjoyed by markets in 2003 once SARS had been contained.”

Ms Shah recommends, “Investors should continue to consider exposure to Emerging Asia as strategic positioning in a region that, even taking account of the coronavirus, demonstrates superior long-term growth potential.

“In the near-term, China’s economy is likely to take a severe hit as fears and travel restrictions weigh heavily on consumer activity. However, a short-lived shock with limited long-term damage to growth should see activity and Asian markets bouncing back sharply once virus cases peak.”

China’s outlook if the virus is not contained

“If, however, the virus fails to plateau within the next two months, prompting Chinese authorities to extend the lockdown to the point that factories exhaust inventories, the growth outlook – for both China and globally – deteriorates meaningfully.

“The risks posed by a more persistent virus outbreak means markets are likely to remain highly susceptible to news of additional coronavirus cases outside of China (as demonstrated by the reaction to news of further infections on a cruise ship off Japan), as well as any extended travel and business shutdown.”

Ms Shah concludes that, “Investors may not be confident in the durability of any global market recovery until the number of reported cases plateaus – a variable which is almost impossible to predict.”

By Seema Shah, Investors Chief Strategist.

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