Investment accounts
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For the first half of February, markets largely shrugged off concerns about the Covid-19 outbreak. A better than expected Q4 US earnings season together with expectations of further stimulus from central banks helped the S&P 500 climb to new record highs.
This widespread complacency did not last. With the rapid increase in Covid-19 cases outside China in the latter half of February, markets immediately turned to panic mode and a sharp sell-off ensued.
The S&P 500 ended the month down 8.41 per cent while the MSCI Emerging Markets index outperformed on a relative basis but still declined 5.35 per cent. This was supported by a record injection of stimulus from the Chinese central bank which has taken a raft of measures to support its economy, including reducing interest rates and banning short-selling.
That said, elsewhere in Asia, a large miss on Japan Q4 GDP numbers soured sentiment towards Japanese equities leaving the MSCI Japan Index to finish down 9.4 per cent in February.
We have minimised exposure where possible and are working on our re-deployment strategy.
In fixed income markets, US yields, as indicated by the US 10-year Treasury closed 36bps lower in February. The US 10-year yield peaked during the month at 1.65 per cent only to collapse to a record low of 1.15 per cent. European rates also moved meaningfully lower on the month. Using the German 10-year bund as a proxy, EU rates fell by 17bps to -0.61 per cent.
Risk aversion also spread into commodities. Crude oil fell 13 per cent in February. Commodities (as measured by the broad Bloomberg Commodity Index) were down by 5.2 per cent in February, mostly driven by the decline of the energy subsector.
Gold in US dollar terms was down 0.22 per cent. The decline in oil is justified by the significantly reduced demand from airlines and transportation. The International Energy Agency cut its forecast for global oil demand growth from 800,000 barrels per day and now estimates it will fall by 435,000 bpd YoY in Q1 2020. The IEA added that it expects a global oil surplus, even with OPEC+ output cuts and for full-year oil demand to be the weakest since 2011.
In currencies, it is common for the US dollar to be stronger during times of market turbulence, however, towards the end of the month, the US dollar started to weaken versus the euro, yen and Swiss franc while it continued to gain against sterling and emerging market currencies. Markets expect further significant rate cuts by the Fed which will cause the interest rate differential to other major currencies to decline.
The ripple effects of a severe disturbance to global trade is not a buying opportunity and as a result, we do not believe this to be the bottom.
Considering the severity of the coronavirus situation, we believe that the negative price action seen at the end of February is only the beginning of a volatile risk-off period.
The ripple effects of a severe disturbance to global trade is not a buying opportunity and as a result, we do not believe this to be the bottom.
We take the view that as soon as the spread slows and eventually dies down, the global economy will recover, most likely aided and boosted by a concerted move of governments worldwide to stimulate and support a recovery.
