Market update – March 2020
Markets pricing in coronavirus risk to global growth
Until recently, investors assumed that the economic impact of the coronavirus would be limited. With the emergence of clusters of infection outside China, the mood is no longer so sanguine. Major equity indices fell more than 10% in the last week of February and government bond yields fell sharply. Markets are now pricing in a higher probability of the epidemic having a meaningful impact on global growth. Assuming that the virus is contained in the first or second quarter, our base case remains that growth will rebound following a short cyclical slowdown. This is likely to have a disproportionate impact on countries dependent on global trade. Lower-growth economies that have been directly impacted by the virus – such as Japan and Italy – could also be tipped into recession.
Central bank response likely – but effectiveness unclear
Major central banks have acknowledged the economic risks of the coronavirus. Finance ministers from the G7 group of nations have said they will "use all appropriate policy tools" to tackle the negative economic impact. The Federal Reserve cut US interest rates by 50 basis points to a range of 1% to 1.25%. Lower interest rates should provide a demand boost. However, central bank toolkits may be of limited effectiveness in dealing with a public health crisis. Lower interest rates cannot solve disruptions to supply chains and the workforce.
Will the UK’s new Chancellor usher in period of higher government spending?
There had been signs that the UK economy was gathering steam prior to the spread of the coronavirus. The latest monthly data on retail sales, manufacturing and employment all surpassed economists’ expectations. The new Chancellor, Rishi Sunak, could add to the momentum in his 11 March Budget. Investors believe he is more likely to agree to significant increases in government spending than his predecessor, who advocated running a balanced budget. While Sunak’s plans remain unclear, the disciplined approach of previous chancellors has left the government with more fiscal headroom than it has had for many years.
We maintain a neutral allocation to equities. We believe that the global economy is sufficiently robust to bear the brunt of the coronavirus shock. However, given the continued uncertainty over the course of the virus, we are waiting for evidence of a peak in coronavirus cases outside China before adding to positions. Recent market volatility has shown the value of our diversified approach to asset allocation. Heading into last month’s sell-off, we had an overweight position in alternative assets, including gold. This has helped protect portfolios against the worst of the equity market falls.
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