Escalating COVID concerns trigger global market risk-off
Fears of wider spread of COVID-19 outbreak triggered market risk-off sentiment this week, with a sharp sell-off in global stock markets and a rush to safe haven assets such as gold and US Treasuries.
· Economists and analysts have started to downgrade economic growth and earnings growth estimates for this year.
· As we mentioned earlier before the current corrections, growth stocks including US tech stocks were overcrowded and there would be better entry points in the near future. Current unwinding of huge long positions in US growth stocks from hedge funds and index funds have magnified the downward pressure.
Global supply chains disruptions & the “Fed put”
· Yes, there is evidence that the supply chains disruptions are happening. For example, manufacturing suppliers’ delivery time especially in Germany and Japan is now longer than normal. High frequency data from China shows that the daily coal consumption by the six major electricity generators are picking up, but still 40% below historical averages.
· In our previous strategy note “Coronavirus Outbreak: An Economic Shock?”, we highlighted that the economic shock is going to be short but sharp. No doubt that the final economic cost of the outbreak is determined by how quickly the epidemic is deemed to be under control and whether it is affecting a much broader part of the world, which are big unknown now and causing anxiety.
· In the worst case scenario that a broader outbreak occurs in US and Europe, the stock market could go down further. In this black swan event, the Fed & other central banks and governments globally will certainty heavily engage in monetary and fiscal easing to support the economies.
· While we are still far from this worst case scenario, market is currently pricing in three rate cuts this year. Also, there are news that EU should likely allow waivers under EU fiscal rules for countries hit by the coronavirus outbreak to spend more and tackle the epidemic. ECB Christine Lagarde reiterated this and called for Eurozone governments to use their budgetary leeway to boost growth amid the bloc's slowdown, particularly under present circumstances.
V-shaped recovery remains our base case; U-Shaped recovery a possibility
· At this point of time, our base case scenario is that the negative impact of the epidemic could be short-lived. However, will we see a quicker recovery in China and global growth later this year, or will it take longer? Timing the market is very difficult. Therefore, any deep corrections are medium-term buying opportunities for quality growth and value stocks as well as megatrend thematic-related stocks.
· Volatility also spiked. Instead of concerning about short-term volatility, investors can take advantage of volatility to get exposure to quality companies and gold through structure products, with the later serves as a hedge to downside risk as well.