Wellian Weekly 09.03.2020

Coronavirus – Equities under pressure again

Last week saw equities come under pressure again, with markets especially volatile towards the end of the week, in spite of a 0.5% interest rate cut from the Federal Reserve. Are there signs of panic in equity markets? We spoke to Asian and emerging markets equity managers last week to understand what scenarios are being reflected in the valuations.

Overall, the view was that equity markets are being quite rational in their response to reports from corporates. One manager pointed out that in the face of a 10% fall in earnings, a company’s share price could normally be heavily punished, but given that we have seen earnings downgrades of 70% or more coming through, the market moves in recent weeks have been quite moderate and, at the timing writing, there has not been an overreaction as yet. The market view is reflecting a scenario in which there will be earnings downgrades in the coming months, but this shouldn’t be the case forever - the market is expecting to see a recovery in corporate earnings after the number of coronavirus cases subside.

Digging a bit deeper, we were interested to hear whether some industry sectors have been viewed more negatively by investors than others. Are there sectors where the market is anticipating the impact of coronavirus will not be temporary; will companies suffer permanent impairment? Equity managers have not seen marked divergence in the performance of industry sectors so far. It was noted that traditionally more defensive companies had fared a bit better, with online businesses (Tencent, Alibaba) benefiting from people spending more time at home, but that cyclical companies with more vulnerable earnings started the year on better valuations, which helped to underpin their share prices. Active managers, however, see good potential for the market to be more discriminating from this point, favouring those with superior fundamentals. Perhaps reflecting the broad nature of the sell-off we have seen in equity markets, managers do not seem to have been making sweeping changes to their portfolios. One manager commented that portfolio changes have been very much at the margin and that making substantial changes in an environment of considerable uncertainty would be too risky.

As we have previously discussed, with China a bigger and more integrated part of the global economy, coronavirus is expected to have a more significant impact than the SARS epidemic back in 2003. The impact on tourism and especially Chinese tourism has already been felt. The timing of the coronavirus outbreak is also relevant as it comes at a time when economic growth is slow or fragile in many parts of the world and governments have little room to lower interest rates. Governments that mishandle the coronavirus threat to their economies, but particularly as an acute healthcare crisis, may weaken their own political positions. There are likely to be some difficult decisions to be taken in trading off the health and economic impact in the coming months. In the near term, we think that countries with scope to use fiscal policy, those with more closed economies and those that are not commodity exporters will find they are better protected, although not immune.

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