Investment opportunities as virus spreads

“In this uncertain climate, we have shifted to a more defensive footing, taking our equity allocation to underweight,” says Luca Paolini, chief strategist at Pictet Asset Management.

“Nonetheless, experience tells us that attractive investment opportunities emerge whenever markets succumb to prolonged indiscriminate selling.

“For now, our base case scenario is that the virus outbreak will shave around 0.3 percentage points (ppts) from China’s GDP growth for the whole of this year, taking it down to 5.6 per cent.

“The impact on the world will be around half as much, with the global economy now likely to grow by around 2.5 to 2.6 per cent in 2020.

“The situation could become much more serious if the coronavirus turns into a full-blown pandemic.

“Academic research suggests that a mild pandemic, like the Hong Kong flu of 1968-9, would trim global economic growth by 0.7 ppts.

“A severe one, modelled on the Spanish flu half a century earlier, would slash it by 4.8 ppts – tipping the world into recession.

“Crucially, the impact will be widespread. Japan, potentially, will be more affected than China; Europe and UK could also suffer a heavy blow.

“The coronavirus may be indiscriminate in who it infects, but not all regions and equity sectors are likely to suffer equally.

“What’s encouraging is that central banks and governments around the world are stepping in to limit the economic damage.

“China is in a particularly strong position thanks to the big role of the state in the economy.

“Japan and Europe both have more limited room for manoeuvre yet both are already feeling the impact of the outbreak.

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