As I write at 4.40 p.m. the FTSE 100 index is down 3.04% and the Dow Jones down 2.27%. The more domestically focused FTSE 250 index is off 3.5%. The equity market sell-off this week has been sudden. Logically it makes sense with global economic activity and trade being hit hard and with it expectations of falls in corporate earnings. Incidentally since January 17 the UK market has declined more than other major markets with a near 10% fall in stock prices (Source: JP Morgan Asset Management). This is because of the UK market’s high exposure to economically sensitive energy stocks which have fallen along with the price of oil.
Today I listened to a webinar about the impact of the Coronavirus epidemic from JP Morgan, presented by Karen Ward and Tai Hui, both Chief Market Strategists at the firm. Tai Hui’s remit is Asia Pacific and he is based in Hong Kong, so he is close to the action. Ward believes that China is now the engine of global growth not the US and so clearly what is going on there impacts the rest of the world. In China the number of daily reported new cases of infection with the Coronavirus, now called Covid-19 has fallen substantially since the beginning of the month but they have correspondingly increased elsewhere as the disease has spread globally. Manufacturing in China has been hit hard and although most factories are now open according to Hui reduced numbers of people are back at work, meaning factories may only be operating at 30-40% capacity. Lengthy supply delays are the result with the greatest impact being on China’s near neighbours. However in China there has been differential performance between companies in different economic sectors. Healthcare and IT have done well generally with the worst performing sectors being utilities, energy and financials. In other economies airlines and travel companies have been damaged. This illustrates why a broad brush judgement of an equity market is not always helpful. Ward observed there will always be winners and it is that at times like this active fund management is favoured. Elsewhere safe haven government bonds and gold have rallied.
Globally governments have been active in providing support for business and the economy. In China government fees and charges have been waived or delayed which relieves pressure on already strained cash flows. In Hong Kong there is a $3.8 billion relief package to support retail businesses, whilst interest rate cuts and fiscal stimulus are other tools available. Singapore is set to run its biggest fiscal deficit* since 1997. Central banks and governments will be aware of the “paradox of thrift.” This is a concept popularised by economist John Maynard Keynes who argued consumption and spending drives economic growth. However in a recession consumers tend to tighten their belts, spend less and save more, the very opposite of what the economy needs. That said I understood the concept in a different way. If you are a business owner facing a sharp downturn and recession naturally cost savings need to be found. However if the belt is tightened too much by closing factories and making too many people redundant for example the business may be incapable of recovery when the economy improves. Paradoxically the measures designed to protect the business may end up killing it. Government support can help mitigate this risk.
Ward and Hui were very careful to stick to the facts and not make predictions about the longer term impact of Covid-19 on the global economy and stock markets. Quite right too, we are in uncharted ground. I certainly don’t want to make predictions. However on this one I can’t help wondering if there has been an over-reaction. If so there could be a sharp V shaped recovery in the spring or summer if the epidemic dies back. Of course I may be totally wrong. If there is a pandemic equities could fall much further. So far none of my clients have been in panic mode. At this stage I would be minded to say hold tight.
*A fiscal deficit means a government spends more than it receives in income
The content of this blog is based on my own understanding of the impact of the Coronavirus on the global economy and global stock markets. It reflects my personal views and is intended as general investment information only. Nothing in this article should be construed as personal investment advice. You should seek individual advice based on your own financial circumstances before making investment decisions.