There has been a rapid and dramatic market correction as a result of the news flow around the COVID-19 outbreak. Uncertainty remains high on key issues: ease of transmission, length of time a person can be infected and contagious without showing symptoms, mortality rates, and length of time before the infection rate stabilizes globally. This appears to be an overreaction, though it would not be surprising to see the sell-off continue. That’s the view of Kristina Hooper, Chief Global Market Strategist at Invesco. Below is Hooper’s analysis of the current global market situation and her thoughts on what might happen from here.
Has Chinese economic data reached the bottom?
The situation in China in terms of contagion already appears to be improving, as new infection data is being driven by cases outside of China. That considered, economic data is poor — especially the February Purchasing Managers’ Indexes (PMIs) released this past weekend. China’s official manufacturing PMI dropped from 50.0 in January to 35.7, while the services PMI dropped from 54.1 in January to 29.6 from.1 However, that is to be expected given the extreme measures taken by the Chinese government to lock down travel and commerce in order to stem the tide of infection.
The data for February will likely represent the bottom, and March data will indicate improvement. If this is the case, it suggests the greatest impact on Chinese economic growth will be felt in the first quarter of 2020. In China, Invesco expects a V-shaped economic recovery, with a sharp rebound quickly following the first-quarter fall.
The path to economic recovery will vary across the globe
However, for many other countries, infections are rising rapidly. And while there are various measures being employed to slow the spread of COVID-19, in general they are likely to be less effective than the actions taken by the Chinese government.
For most major economies, depending on how the virus develops, there is a risk of a significant negative impact on growth through the second quarter of 2020 and possibly longer. Some countries’ economies will experience a V-shaped recovery while others will experience a U-shaped recovery, with a rebound taking longer to get off the ground. The path of economic recovery depends on the length of time the contagion spreads without stabilization, as well as the policy response of each respective country.
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