Impact of the coronavirus on the economy and markets

2 min. reading
Coronavirus, Market news / 19 February, 2020
Impact of the coronavirus on the economy and markets

Communications

Economic impact

The coronavirus is generating economic and financial uncertainty. It is still too soon to have a clear understanding of what economic impact the outbreak will have in China. However, initial estimates point to an impact of 1 pp of growth in the first quarter, with factories closed until after 9 February and tourism and international trade being clearly dented. Nonetheless, partly as a result of the robust measures imposed by Chinese authorities, the low rate of mortality (2.1%, well below other epidemics) and because an appropriate stimulus package was provided, activity should recover in the second quarter, practically offsetting the entirety of the losses suffered during the first quarter.

Global growth in the full year may be undermined by between 10 bps and 20 bps, unless the outbreak endures beyond February/March, given that Asia as a whole now represents 37% of the global economy. However, this should not end the expansionary stage of the cycle nor the good momentum seen in recent months, partly due to improved economic confidence as a direct result of the signing of a trade deal between China and the USA.

The first chart depicting Chinese GDP consensus data (20e 5.9% and 21e 5.8%) is yet to reflect the impact had by the coronavirus. The second chart shows that the Chinese economy was outperforming estimates until a week ago, which may help to ensure rapid recovery in the second quarter.

CHINA EXPECTATION GDP

PIB CHINA GDP
Fuente: Bloomberg

CHINA SURPRISES INDEX

sospresas citygroup china

Market impact

Stock markets have lost 4% value on average since 17 January, spearheaded by China, which has dropped 12%. Investors buy up safe-haven assets, sovereign bonds have seen inflows of money and YTMs therefore in decline, as the chart below illustrates.

From a strategic point of view, and with all due prudence since there is no clarity as to when the coronavirus will be contained, we do not believe the impact will be sufficient to change the course of the international economy (global GDP 20e 3%) or tarnish our upbeat opinion on stock markets, with positive expected returns for the full-year of approximately 10%. We expect the second half to benefit from an already evident rally in economic confidence, with potentially improving business earnings and maybe even positive ramifications for business investment. Similar episodes in the past have been absorbed by the global economy and financial markets without too much difficulty within a few weeks.

Tactically, for the moment we see no need for significant changes to portfolio positioning. Our investment process, which takes a disciplined approach while also reflecting trends from a range of different indicators and market conditions, currently indicates a scenario that remains conducive to holding a medium/high level of portfolio risk.

STOCK MARKETS: CORONAVIRUS IMPACT

Bolsas: impacto coronavirus

 

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