The outbreak of the coronavirus has injected volatility and uncertainty into markets across the globe from the start of the year. Overall, we remain vigilant in asset allocation that allows us to navigate the global and specific risks associated with the coronavirus and, guided by our fundamental and technical views – deploying capital where we see opportunities. Our suite of globally diversified strategies allow us the flexibility to nimbly navigate evolving market conditions and take advantage of asset classes that have the potential to outperform, given outsized moves relative to our investment views.
Our multi-asset portfolios have performed as expected with limited downside, demonstrating the effectiveness of diversification across asset classes and geography[1]. In particular, we have maintained our exposure to developed markets (DM), including the US and Europe, where the coronavirus has yet to inflict significant economic and financial damage. Weakening global sentiment regarding the unknown trajectory of the coronavirus is impacting equity risk premiums and sentiment – this is more apparent in Asia-Pacific markets, credit spreads, and yields, particularly in China.
The near-term global macro landscape
Ultimately, the coronavirus should be viewed as a sizeable external demand shock that also carries supply-chain implications. The extent of the damage should be based on the degree to which global consumer behaviour changes. This is difficult to forecast, but having digested the available information and sought the views of our investment and research experts, we observe the following:
Our 2020 outlook highlights that in the second half of this year, a mild global rebound should occur. This rebound will be supported by low rates and cyclical sectors (housing), a bottoming in data about sentiment, economic stabilisation in China and gradual inventory restocking. We have moderate conviction in this multifaceted view, though slightly reduced by greater uncertainty in the “stabilisation in China” component.
From a near-term perspective, we must focus on the first quarter of this year, which is still the “pain point” for US (and global growth) – particularly as the global manufacturing/trade recession and supply-chain shocks work their way through the system. With markets pricing in “perfect macro”, we see the scope for soft economic data over the next two-to-three months that will call the second-half rebound narrative into question. In our view, this will ultimately be a buying opportunity, but in the meantime, it’s likely to produce short-term macrogenerated risk-off sentiment (amplified by the coronavirus).
China macro outlook
Our multi-asset portfolios are globally diversified, however, for the benefit of our investors, we’d like to provide China macro views below:
- We expect economic losses in the services sector – retail sales, hotels, and entertainment – that mirrors the Severe Acute Respiratory Syndrome (SARS) outbreak (given how close the coronavirus outbreak landed to Chinese New Year).
- A ramp-up in monetary and fiscal stimulus measures.
- Further weakness in the renminbi (CNY) on the back of risk aversion and pressure from lower rates (the currency floats more now than it did in 2003). Our Macrostrategy team has a cautious outlook on the CNY (a 3–6 month US dollar/CNY target of 7–7.05) but we are likely to get there more quickly with these developments.
- We also expect a more subdued, but still relevant, confidence shock through DM, including the United States, Europe, and Canada, as confirmed cases of the coronavirus put pressure on the services sector. Our primary concern is the global housing and retail sales activity, which may become distorted in January and February.
So far, we don’t expect this to be a game changer, but it will add to the overall uncertainty.
Conclusion
In terms of understanding the coronavirus, the MAST team believes we have still to see peak fear and will continue to take a constructive view of Chinese data regarding infection levels and death rates, vaccines or mutations, and policy actions from governments. Likewise, the shutting down of two-thirds of the Chinese economy will impact macro data. However, consensus still sees this action as solely a first-quarter event and has yet to downgrade full-year 2020 GDP. In our view, current GDP forecasts are at risk unless we see Chinese stimulus, liquidity injections or interventionist policies.
Overall, we are looking to redeploy cash into risk assets as markets become more immune to negative coronavirus-related news flow, in particular, EM, as we believe they offer a substantial valuation cushion relative to their DM peers.
