Coronavirus: markets take fright – what lies ahead?

As investors reassess the potential impact of the coronavirus on global growth and financial markets, we outline our current positioning and what might cause us to change our thinking.

Go to the profile of Cazenove Capital
Feb 27, 2020

Before the start of this week investors had been happy to largely brush off fears of a global pandemic, working on the assumption that as long as a broader outbreak of the coronavirus outside of China was avoided, the impact on global economic growth would not be too severe.

Buoyed by this and the continued provision of liquidity from central banks, the view was that the global economy should avoid slipping into recession in 2020.

However, with the news over the weekend of accelerating growth of clusters of coronavirus infection outside China (notably in Japan, South Korea and Italy) this base case scenario has been called into question and investor sentiment has turned notably more cautious.

This was reflected in Monday’s market movements, with global equity markets selling off by between 3% and 4%, wiping out the gains made this year. The S&P500 fell 3.4% and the FTSE100 3.3%.

Defensive assets including government bonds, the US dollar and gold rallied as investors rushed to allocate to perceived "safe havens".

Markets took the virus in their stride – until the recent spread beyond the borders of China

As investors reassess the potential impact of the coronavirus on global growth and financial markets, we want to outline our current positioning and what might cause us to change our thinking.

We are happy to maintain a neutral allocation to equity

Our base case remains that the virus will ultimately be contained and that although global growth will take a shorter term hit, it should snap back in a similar fashion to previous episodes.

The potential impact of the coronavirus aside, the overall state of the global economy looks to be in a reasonable shape following the recent quarterly corporate guidance as well as the expectation of greater fiscal spending globally. Continued large injections of liquidity from central banks should benefit risk assets.

If we saw significant weakness in markets we could use this as an opportunity to add to our equity positions.

Volatility levels are likely to remain elevated

Compared with the start of the year, uncertainty levels have risen considerably – uncertainty about supply chains, final demand and input prices, all of which translate into uncertainty about profit margins and earnings. We feel portfolios should be reasonably positioned to deal with volatile market conditions and afford us the option to wait for more and better information upon which to base any future investment decisions. Short-term market timing around risk events in the absence of meaningful information has proven to be difficult and not necessarily beneficial to returns.

In this environment, the option to wait is valuable, a fact worth remembering as coronavirus fears continue to obscure the outlook in global markets.

We continue to monitor the impact on earnings and global economic data

We expect that data for the first two quarters will be softer as a result of the coronavirus, with signs of recovery as we move into the second half of the year.

The risk remains that the spread of the virus outside of China will more meaningfully disrupt global supply chains and we therefore see the possibility of softer economic data later in the year. Governments and Central Banks would be expected to respond in this situation as it would otherwise increase the risk of recession. An increased likelihood of recession could lead us to reassess our risk exposure.

We continue to favour an allocation to alternative assets including gold

These have historically defended capital in periods of market volatility. While gold has performed well already this year and now sits close to seven-year highs, we are happy to maintain our holding, particularly considering the rich valuations of government bonds.

Christopher Lewis

Investment Manager

This article is issued by Cazenove Capital which is part of the Schroder Group and a trading name of Schroder & Co. Limited, 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested. This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements. All data contained within this document is sourced from Cazenove Capital unless otherwise stated.

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Go to the profile of Cazenove Capital

Cazenove Capital

Cazenove Capital is the wealth management arm of Schroders in the UK and Channel Islands, providing investment management services to private clients, intermediaries and charities. The company’s strength is founded on the lasting relationships built with advisers and their clients, combined with access to the global expertise of the Schroders group. The DFM team has worked closely with financial advisers for 17 years meeting their individual requirements and supporting them in providing discretionary fund management to their clients.

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