House Views - February 2020 -Sidetracked by Wuhan

Macro
The Wuhan flu epidemic has led to travel restrictions for many tens of millions in China, with factories and offices extending their lunar new year holidays. The hit to growth is set to be sizable but we expect it be short-lived, with recovery likely as the virus begins to come under control.  Recent business confidence surveys have confirmed our scenario of gradual stabilisation and recovery in manufacturing activity, bolstered by the “phase one” truce in the US-China trade war. With Brexit formally concluded at end-January, attention now shifts to the difficult negotiation of the UK’s future relationship with the EU.

Central Banks
We expect the European Central Bank (ECB) and US Federal Reserve (Fed) to remain on hold this year, keeping interest rates at current levels. The Fed has indicated that its Treasury bill purchases might be reduced over the second quarter, as interbank rates have come back in line with its objectives. The Peoples’ Bank of China (PBoC) might be encouraged to ease policy further to mitigate the coronavirus-induced hit to activity while several other emerging world central banks continue to cut rates in light of sluggish inflation.

Markets
G7 10-year government bond yields have slumped even lower in reaction to the coronavirus outbreak, leaving them deeply negative after inflation. Corporate bonds offer better value, although we highlight the rising risks in lower-quality issuers in the US. Rising UK business confidence and undervalued exchange rates could favour Sterling against the US dollar. Short-term flu risks can weigh on Asian and global equities but recoveries from previous epidemics have tended to be rapid – we continue to expect higher levels by year-end.

Bottom line
We maintain a preference for global equities over fixed income investments and propose keeping overall asset allocation unchanged. Although short-term risks have risen in emerging market equities, upside performance potential remains much more attractive and we suggest remaining Overweight. Abundant liquidity conditions and low financing costs combine to underpin credit (i.e., corporate and emerging debt) and we maintain an Overweight stance. Gold remains our preferred diversification vehicle in diversified portfolios, with
prices underpinned by robust demand.

In accordance with the applicable regulation, we inform the reader that this material is qualified as a marketing document CAO9/H1/2020

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