House Views - March 2020 - Growth Backtracks for Now

Macro
In recent days, the coronavirus epidemic has spread more widely beyond China’s borders, raising fears of a hit to global growth. At the same time the rate of progression of the virus in China has slowed, enabling many companies to reopen offices and factories, although not yet at full capacity. We expect a sharp slowdown in China’s output in the first quarter, followed by a pickup from Q2. In other countries, outbreaks of the virus are likely to be met with the same measures as in China – quarantine, travel restrictions, factory closures etc. – meaning that the impact on their growth may continue into the second quarter, before recovery takes hold.

Central Banks
Market expectations for US Federal Reserve (Fed) rate cuts have risen in recent days in response to the unfolding epidemic. We expect policy-makers to be on high alert for any deepening of risks but they may hesitate to cut in the short term. The European Central Bank (ECB) remains unlikely to cut rates further into negative territory and may prefer to boost its asset purchases if called on to ease policy. The Peoples’ Bank of China (PBoC) has cut a number of its key rates and stands ready to ease further were the return to work to be delayed again. Other emerging world central banks have followed suit, taking advantage of current low inflation levels.

Markets
After a period of resilience, western world equity markets have sold off in recent days as the coronavirus spread beyond China, a typical reaction to such outbreaks. On the other hand, Chinese equities have begun to outperform as the number of new cases of the disease there showed signs of peaking. We expect global stock markets to recover lost ground once the epidemic begins to come under control. Safe havens such as G7 government bonds, gold and the US dollar have provided useful diversification. However, we suggest more caution on lower-quality higher-yielding (HY) corporate bonds – issuers may face cash-flow problems as the crisis drags on.

Bottom line
We suggest keeping a broadly diversified approach to portfolio construction, with a focus on safe-havens such as fixed-income and gold, which remains our preferred diversification tool. Given the risks to credit quality in HY bonds, we propose locking in some profits to reduce exposure. We suggest keeping a Neutral stance on global equities given the short-term risks but remain confident that markets should rally in the medium-term once better news about the coronavirus outbreak emerges. Similarly, Brent prices should rally back towards our target $60-70 range by year-end.

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

Read full article​​​​​​​