Rising concerns over the coronavirus 2019-nCoV, led to a sell off in equity markets this week, as the impact of the virus began to hit the global economy. Airlines suspended routes and factories closed, amid warnings that China’s economic growth could fall. However, US equities, at least before the open on Friday, finished the week largely unaffected despite suffering their steepest losses in four months on Monday. Investors were reassured that US interest rates were unlikely to rise in 2020, as Fed chair, Jerome Powell, said they were yet to see a decisive recovery in the manufacturing sector which weighed so much on growth in 2019.
As of 12pm London time on Friday, US equities over the week were down 0.4%, with technology stocks having fallen only 0.2%. However, it was a different story for Hong Kong stocks, which tumbled 5.9%, whilst mainland Chinese bourses remained closed for the week due to the lunar new year. Emerging markets as a whole fell 4.2%. European equities fell 2.3%, UK equities dropped 3.0%, although more domestically focused mid cap stocks proved to be relatively defensive, falling 1.9%. Japanese equities lost 2.7% and Australian stocks fell 1.0%.
Developed market government bonds rallied, with yields falling (yields move inversely to price) on 10-year US Treasuries, German Bunds and UK Gilts, now trading at 1.56%, 0.53% and minus 0.42% respectively.
US interest rates remain on hold, with economic data releases reassuring, if unspectacular
Aside from concerns over 2019-nCoV, investors were heartened by robust, although unspectacular, economic data releases from the US. Durable goods orders rebounded in December, although new orders for non-defence capital goods excluding aircraft, which are often considered a proxy for business investment, fell in the month. US pending home sales also dropped, falling 4.9% in December, the worst fall in more than nine years. However, this was put down to supply constraints rather than a lack of demand. Notably, the technology company Apple reported a new record for revenue and profits during the Christmas holiday season, helping to justify the more than doubling of its share price over the past year. Interest rates were left on hold in the 1.5% to 1.75% range, with expectations rising for a rate cut if anything, over the coming months.
Eurozone data less than convincing, although unemployment falls to its lowest level in almost 12 years
Data out of the Eurozone was less than convincing, with German business confidence falling in January, against expectations for an improvement. The French economy unexpectedly contracted at the end of last year, as the economy was impacted by protests and strikes over pension reform, with GDP shrinking by 0.1%. However, on the brighter side, unemployment fell to 7.4% in December for the Eurozone, the lowest level in almost twelve years, with the biggest improvements recorded in Bulgaria, Croatia and Greece.
UK economy still waiting for an economic bounce
In the week that the UK finally leaves the European Union, service sector confidence showed signs of improvement. Sentiment recovered to minus 4.9 in January, from minus 15.7 in December, with a negative number indicating the majority of businesses are reporting deteriorating activity. The service sector represents 80% of the UK economy. Manufacturing sentiment remains weak, with the survey recording a small improvement to minus 19.5 in January, from minus 22 in the month before. However, for retail, the picture continued to deteriorate, with sentiment coming in at minus 21.8, falling from minus 15.6 in December. Despite this, the Bank of England decided to leave interest rates on hold at 0.75%, choosing to wait and see how the economy progresses following last December’s general election.
Australian shares weighed down by 2019-nCoV
The Australian share market finished lower for the week, as investors weighed the economic costs of the virus outbreak in China. In particular, shares in iron ore mines sold down, as the price of the China dependent commodity also fell. Rio Tinto ended the week down by 7%, BHP Billiton finished 4% lower and Fortescue Metals Group tumbled 9.1% lower. Meanwhile, the technology sector was one of the better performers with Link Administration, a digital financial services company up 9.66% on Friday alone, after the company announced an acquisition strengthening its presence in Europe. Beyond stocks, concerns over the virus also impacted the Australian dollar, which is now approaching levels not seen since 2009. The Aussie dollar fell by 1% to US $0.67.
Issues under discussion
Investors are weighing up the likely impact of the coronavirus 2019-nCoV on the global economy, and whether it may present a buying opportunity in stock markets, as the outbreak of SARS did in 2003. However, as ever, it is not as straight forward as looking at history. 2019-nCoV is reputedly much more contagious than SARS, and unlike in 2003, the Chinese economy is a much more significant part of the global economy. Additionally, back in 2003, valuations on stocks were much lower than today, as it was not long after the bursting of the Dotcom technology bubble. For the moment we are sitting tight, waiting to see how things progress, whilst the portfolios are benefitting from some of the more defensive strategies that we invested in during 2019, such as the Polar Capital Global Insurance fund