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.

Portfolio positioning

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.

The opinions contained herein are those of the author and do not necessarily represent the house view. This document is intended to be for information purposes only. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Cazenove Capital does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This does not exclude or restrict any duty or liability that Cazenove Capital has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Cazenove Capital is part of the Schroder Group and a trading name of Schroder & Co. Registered Office at 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. For your security, communications may be taped and monitored. 

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James Brennan

James Brennan

Portfolio Director