In terms of the impact and the policy response Hooper anticipates:
• The US experiences a V-shaped recovery given favourable economic conditions in the country.
• The coronavirus to have an unsubstantial impact on the global economy beyond 2020. Though the timeline is uncertain Hooper believes it to be relatively short-term in nature.
• In terms of earnings, Hooper expects a recovery in Chinese equities first. It will likely take longer for an earnings recovery for other major stock markets given where they are in the contagion cycle.
• China has continued to provide significant stimulus, both monetary and fiscal, to help support its economy, and most other major economies are expected to provide an adequate policy response.
• However, developed countries will likely focus on monetary policy rather than fiscal stimulus. Federal Reserve (Fed) Chair Jay Powell issued a statement of reassurance on Friday: “The fundamentals of the US economy remain strong. However, the coronavirus poses evolving risks to economic activity. The Federal Reserve is closely monitoring developments and their implications for the economic outlook.” This indicates the Fed stands ready to act and provide monetary accommodation if needed.
• A specific risk is that a rise in infections will lead to people hunkering down more, resulting in cash flow issues for select companies, resulting in wider credit spreads. Policymakers may need to respond to provide emergency liquidity.
Asset class implications
At a tactical level, investors should continue to favour risk assets, especially stocks, but ensure they are well-diversified. Invesco believes this is still a secular bull market, favouring stocks over bonds and credit over Treasuries. Nonetheless, investors should be prepared that, in the near term, volatility in markets is likely to persist, and equities and credit may fall under additional pressure. The good news is that the 10-year US Treasury yield and the copper-to-gold ratio seem to already be pricing in close to worst-case scenario outcomes. Within stocks, Invesco favours Chinese equities as well as global equities that have significant revenue exposure to China, given their view that earnings will likely recover first in China due to the trajectory of the disease. US stocks could also perform well, given expectations that the Fed will provide adequate policy support. While the market is likely not at the bottom, investors should be ready to take potential advantage of buying opportunities as they present themselves. Within fixed income, credit is favoured over sovereign debt. This is particularly so given currently falling rates. Adequate exposure to alternatives, including real estate, is certainly encouraged.
1 Source: South China Morning Post, “Coronavirus: China’s factory activity plunges to all-time low, worse than global financial crisis, February data show,” 29 February, 2020
