Coronavirus continues to spread, now hitting Italy, but are investments recovering? While some markets recover, others are not faring as well. Can we begin to see recovery in the near future? Patrick Brusnahan asks the experts
Mondher Bettaieb-Loriot, head of corporate bonds, senior portfolio manager, Vontobel Asset Management
Italian corporates should be relatively resilient to their Corona virus outbreak. The Italian press and economists forecast their outbreak to just affect GDP by 0.2% causing a minimal effect to European wide GDP.
The large Italian corporates prevalent in credit indices are either Banks, Utilities and Telecom companies. All of these are essentially domestically oriented and non-cyclical, and are therefore less likely to suffer. They are also very profitable and the demand for their products should therefore hold. The current political climate is also more stable giving the current coalition Government the opportunity to address this temporary health weakness transparently and effectively.
It is interesting to note that when compared to normal Influenza statistics, the number of positive cases usually increase towards the end of February to peak in March and recede in April. Therefore, this can be used as a road map and would reinforce the temporary nature of this episode in Italy. Should this be the case and given that credit ratings are medium term oriented, we do not believe that this incidence would have any impact on longer term ratings at Italian corporates as the agencies typically award ratings through cycles.
I am therefore comfortable holding Italian corporates as they are currently providing excellent carry for their credit fundamentals. I don’t plan on increasing nor decreasing my Italian corporate exposure but hold it steady as it already represents an overweight of 7.5%. The names we hold are generally household names such as Assicurazioni Generali, Mediobanca, Unicredito, Intesa SanPaolo, Enel, and Telecom Italia.
Finally, there should be no need for the ECB to further relax monetary policy on this temporary episode considering also the very strong and sufficient stimulus packages already ongoing namely the open ended quantitative easing programme, the re-investments, the tiering system for bank liquidity and the TLTROs. Although not our base case, should further measures be required, the ECB still has enough tools at its availability such as increasing their monthly purchases to address any unforeseen weakness that could develop. In short, we believe both the spring season and monetary stimulus will bring relief and recovery, enabling capital to continue to chase carry.
John Butters, chief investment officer, Weatherbys Private Bank
Much of the media comment at present is focused on the coronavirus. New Scientist magazine went into some detail in its early February issue.. The virus, unlike some, does not peter out after infecting a few people; some cases are mild which means quarantine is difficult; and actual cases may be 10 to 40 times the confirmed number. New Scientist argues that a pandemic – which is to say, a disease outbreak that spreads worldwide – therefore seems likely.
That would have a terrible human cost. But important events in human terms often have a surprisingly small effect on markets. Let us look at stock market behaviour during pandemics of the past. The worst modern case was the Spanish flu outbreak of 1918. The UK stock market rose strongly in both 1918 and 1919, thanks to the end of the First World War. During the Asian flu pandemic, the UK market rose in 1957, helped by the end of the Suez crisis, and had a remarkable year in 1958 as interest rates were cut and wartime restrictions on companies were finally relaxed.
At the time of the Hong Kong flu pandemic, the UK market had another outstanding year in 1968 as interest rates were cut during a consumer spending boom; it had a modestly bad year in 1969, but that probably had more to do with a credit squeeze and the need to arrange a lending facility from the IMF. The H1N1 flu pandemic of 2009 coincided with the strong rebound in markets after the global financial crisis. Overall, it seems that pandemics, awful as they are, have not necessarily hurt equity returns.
In my commentary at the start of 2019, I said that the market is prone to bad moods that often do not last. 2019’s returns are a case in point. Markets may, or may not, wobble over the coronavirus. That makes no difference at all to our expectation of good long-term returns.
Rupert Thompson, chief investment officer, Kingswood
Equities have finally succumbed. Until Friday, global markets were still hovering around their January highs. But markets fell back 1% or so on Friday and the UK and European markets are down more than 3% this morning.
The recent spread of the virus outside of China, with Korea and Italy both now imposing quite radical containment measures, has spooked equity markets. It has also fuelled further gains in safe havens such as gold and US Treasuries.
While cases outside China are rising fast, which is undoubtedly worrisome, one should not lose sight of the fact that they are still below 2500. This is dwarfed by the 77,000 cases in China, where the latest news has actually been very reassuring.
Cases in China have in recent days been rising at less than 1% per day, down from 15-20% per day in early February. The radical containment measures imposed by the authorities seem to have worked and restrictions in cities such as Beijing are now starting to be relaxed. If China has managed to contain a much bigger outbreak, it can only increase one’s confidence that the, as yet, much smaller outbreak outside China can be brought under control.
The disruption caused by the virus will hit economic activity significantly in the first quarter, with global growth very likely to grind to a halt. But we continue to believe that the outbreak is likely to follow the path of previous such health scares with growth rebounding in the second and third quarters. Our confidence on this front is increased as monetary policy will be relaxed if necessary to limit the damage. Indeed, the Chinese authorities have been doing exactly that.
We retain our neutral equity weighting for now. Prior to the outbreak of the coronavirus, we had been planning to add to our equity positions if markets see a significant correction. Our inclination is to stick with this game plan although any such move would clearly hinge on the latest developments.
While the coronavirus will remain centre stage over coming weeks for global markets, attention in the US and UK will also be focused on other matters. In the US, we have Super Tuesday on 3 March, when 15 states, including the heavyweights California and Texas, vote for their preferred Democratic candidate. Bernie Sanders is currently leading the race and Super Tuesday will be critical if he is to cement his lead.
As for the UK, we have the Budget on 11 March which will reveal to what extent Rishi Sunak, the new Chancellor, bows to No 10’s demands for a substantial fiscal stimulus.
Last but not least, trade negotiations kick off with the EU at the end of this week. The initial position of both sides has been uncompromising and highlights the difficulty of reaching a trade agreement by year-end. But these hard-line stances are no doubt in part just posturing and we still believe an agreement will be reached by year-end – even if it ends up being no more than a lite version of the Canada-EU deal.
Chris Towner, director, Chatham Financial
The pace of the spread of infections of the coronavirus outside of China has caused the financial markets to drop dramatically today with the FTSE falling over 3%. This renewed fear is due to the spread of the virus outside of China with South Korea and Italy being the latest countries to report a surge in people infected.
This latest news has caused markets to start to price in the risk that the coronavirus reaches a point where new infections no longer come from Chinese nationals. It makes the virus far harder to contain and if the spread continues more broadly across the globe then trade and travel are bound to be further impacted. It is clear now that Q1 global growth will be impacted by the spread of the virus especially in China where small to medium sized businesses are strapped for cash amid the obligation to carry on paying staff.
So, the questions being asked now are how much further can this virus spread? Also, how quickly can a cure be found? There is hope that we are now through the deepest and darkest of winter and warmer temperatures may help to restrict the spread. However, we are clearly not yet out of the woods and for now financial markets will remain on edge.”