Equity markets shrugged of fears of the potential global economic impact of the recent coronavirus outbreak in the past week, with positive corporate earnings data and indications that the virus’s growth rate is slowing helping to improve investor sentiment. As a result, global indices edged up over the week, before risk off sentiment re-emerged on Thursday when Chinese officials deployed a revised methodology to diagnose the coronavirus. The number of confirmed cases soared – raising questions about the true extent of the outbreak. Equity markets lost ground made earlier in the week, while safe havens advanced. Meanwhile, the race for the White House is now well under way, with presidential hopefuls battling it out for the Democratic Party’s nomination in caucuses and primary elections across the US.
As we look ahead and consider our outlook, despite the immediate virus fears, we remain optimistic given improving economic fundamentals and arising opportunities in markets following the recent drop back in valuations.
Coronavirus Outbreak Update
New cases jumped by almost 15,000 today after Hubei province, the epicentre of the coronavirus outbreak, revised its method for counting infections, bringing the total number of cases to almost 60,000. On Thursday morning the Hubei national health commission said it would start including cases confirmed by ‘clinical diagnosis’, which refers to using CT imaging scans to diagnose patients, alongside those confirmed by the previous method of nucleic acid testing kits. Previously, many patients with pneumonia-like symptoms found via CT scans could not be diagnosed as positive without an additional nucleic acid test.
Investor sentiment had been improving in recent days amid speculation that the impact from the virus would be short-lived and signs the growth trend of the virus was slowing, helping global indices regain some ground lost in recent weeks. However, the abrupt spike in new cases today reversed the declining growth trend, renewing concerns about the true scale of the outbreak and the potential economic impact. As a result, equity markets pared gains made earlier in the week as investors moved into safe haven assets such as treasuries, gold and the Yen.
For information on our views on the Eurozone recovery given the recent Coronavirus developments, please see the attached Market Update document.
US equity markets reached record highs at the beginning of the week on better than expected US fourth-quarter corporate earnings and generally positive economic data. In general, the data has come in above market expectations, with average earnings 4.6% higher than anticipated and forward guidance for 2020 also looking strong. As a result, it now looks likely that the fourth quarter of 2019 will end the US corporate earnings recession after three straight quarters of negative growth. Overall however, the slightly improved earnings data still represents below average profitability and the large gap between profits and debt growth persists. In addition to this, it is our view that the main US indices are currently extremely overvalued, and as such we maintain our negative outlook on US equities.
Four years after the world watched Donald Trump’s momentum build and build until he became the Republican nominee, America is again deciding who will run for the White House. The Democratic Party will choose their nominee to challenge President Donald Trump during four months of caucuses and primaries in every US state and territory, that began in Iowa in February and will conclude with the US Virgin Islands in June.
Joe Biden remains the frontrunner in national polls but lacklustre fundraising and a fourth-place finish in the Iowa caucus suggest otherwise. Bernie Sanders, meanwhile, has started strong, clinching back-to-back victories in Iowa and New Hampshire – the first two states to hold primaries, cementing the self-described Democratic socialist’s place as the frontrunner for the Democratic nomination. In terms of the market reaction so far, some are concerned about the effect a far-left wing candidate would have on the US economy, as his entire political life has been devoted to fighting against the financial establishment. Sanders is pro-regulation and firmly in favour of higher taxes for the ultra-wealthy and corporations. Given that the current President, Donald Trump, runs on the polar opposite of this point of view, the US stock market could have to drastically re-price its growth outlook if Bernie’s campaign gathers momentum. However, the general consensus is that Bernie is too far left of a candidate to beat Trump, and a more moderate candidate would be much more competitive. Pete Buttigieg has also had a strong start to the primaries and is beginning to draw more attention from voters – and more attacks from presidential rivals who view this newcomer to national politics as a serious threat.
Over the week, following an in-depth analysis of the global economy and the risks and opportunities ahead, with our medium to long term outlook remaining unchanged, we decided to use the recent drop back in equity markets as an opportunity to buy into certain areas of equity markets at reduced valuations. As a result, we were able to take profit on some of our bond exposure following a period of outperformance in favour of equity exposure, allowing us to return to the normal level of equity allocation within the portfolios at a favourable buy in point. It is key to highlight that in doing this we are by no means rushing into equities, but rather we have now returned to a normal level of exposure in line with our cautiously optimistic outlook.
Equity exposure varies depending on the level of risk you have opted to take in the portfolio, with more cautious clients increasing exposure to global equities via traditional funds and Investment Trusts (which allow us to benefit from upward momentum as well as an increase in value of the underlying assets), while clients wishing to take more risk have gained exposure to Global, Japanese and Emerging Market equities, areas where we see particular potential for strong performance given improving economic fundamentals.
Key Events We Are Watching This Week:
- Friday: EU Balance of Trade, US Manufacturing Production
- Wednesday: UK Inflation Rate
For anyone who wants further data to substantiate the position please review the attached Global Economic Update document and the Economic Dataset below.
Model Portfolios & Indices
Global equity markets experienced high levels of volatility over the week, with markets rallying on positive earnings surprises and indications that the coronavirus outbreak is being effectively contained. The OBI portfolios have this week been repositioned in line with normal market conditions, and we have now returned to normal equity content within the portfolios. The portfolios gained over the week as markets rallied and equities regained ground, while non-equity assets also continued to perform strongly on uncertainty over the virus outbreak.
Please note that the YTD data in the table below reflects performance from the start of the new year.
The data above will not directly correlate to the indices as there is always a delay in pricing because the US markets close significantly later than the European markets and the Asian markets. The data set above reflects the last close and much of the day’s movements will not yet be reflected in the portfolios due to pricing delays. You cannot therefore directly correlate indices to the portfolios. The value of investments may fluctuate in price or value and you may get back less than the amount originally invested.
Past performance is not a guarantee of future performance. Performance figures quoted include the fund manager charges but exclude other fees such as adviser, custodian, switch and/or discretionary investment management fees. Unless otherwise instructed and accrued, income is reinvested into the portfolio.
This Day in History
On this day in 1689, the British Parliament adopted the Bill of Rights which greatly limited royal power and broadened constitutional law. The bill lays down limits on the powers of the Monarch and sets out the rights of Parliament, including the requirement for regular parliaments, free elections and freedom of speech in Parliament.
Have a great week,
Jason & Gina