Coronavirus continues to unsettle markets. It has been a month since the virus first began to hit the headlines, and with each update from the World Health Organisation, or news of the virus spreading to a new region, there is a market reaction. There is little doubt that coronavirus will have an ongoing impact on global markets and economic growth. Markets do not like uncertainty, and this is an unknown with no precise precedent to help inform the forecast.
When markets are spooked, correlation across regions and asset classes increases. The fourth quarter of 2018 is a good example of this in recent history. When US recession fears spiked, we saw stock markets across the globe fall in unison, taking other asset classes with them including bonds and even the oil price.
We have seen a similar pattern over the past few weeks; Asian markets, which open first due to the time difference, create a ripple effect, opening down on the news that more cases have been confirmed, leading to falls in European stocks, followed by the S&P 500. On Monday this week global markets were a sea of red.
There are pockets of more acute impact. Regionally, it is Asian markets which have seen the greatest falls, with the Shanghai Composite dropping 10% on 3rd February. This was the first day of trading following the market close for Chinese New Year; almost every stock listed on the exchange was down, bar those involved in the healthcare and pharmaceutical sectors. But this slump was followed by a rally the next day that made back most of the losses. Today the Shanghai Composite sits at the same level it was at Christmas, but is unlikely to stay at these levels for long.
At a sector level, we have seen consumer discretionary stocks such as luxury goods firms LVMH and Burberry take a hit and beauty conglomerate L’Oreal has seen share price volatility. All three firms rely on Asia for around 30% of revenues. Leisure and holiday firms such as Carnival, Wynn Resorts and Disney have also seen their share prices fall significantly. Sectors which are reliant on trade to distribute their products are at risk as and when borders are closed and sea tankers are grounded – as are those sectors such as technology, autos and industrials which rely on the free movement of components such as chips, parts or materials in their construction.
Continue reading article…
