Market comment - Coronavirus worries markets, but long-term impact limited

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Global financial markets are feeling the effect of the coronavirus outbreak. While the health consequences are extremely serious for those affected, the virus is not expected to have more than a transient – albeit significant - effect on markets and the Chinese and global economies.

As the coronavirus outbreak continues to cause global concern, it has already claimed more than 100 victims and suspended travel for tens of millions of Chinese. Unlike the severe acute respiratory syndrome (Sars) outbreak 17 years ago, Chinese health officials announced the threat with little delay and took fast and drastic action to contain it. A cause for concern, however, is that health officials do not know how fast it is spreading. The virus could spread faster than Sars, given that contagion can occur during the incubation period, which can last as long as two weeks.

Global markets pressured

Global equity markets are under pressure as a result of the virus; and it is possible that the outlook for earnings will be negatively affected in the near term. So far, the major indices in developed markets have declined by about 2-3%, with European markets being hurt more severely than US markets. We expect that Asia will be the hardest hit, given its proximity to the outbreak. Chinese markets, however, are closed for the Lunar New Year holiday – which has now been extended by the authorities by three days. As such, the real impact is not yet visible in Asian markets.

There are, however, individual global subsectors, including transport, leisure and luxury retail, that are under particular pressure. These subsectors, which have declined by more than 10% in some cases, are directly linked to Chinese consumption and travel. Similar repercussions were seen during the Sars virus outbreak in 2003.

Investors seek safe-havens in bonds, gold and the US dollar

The risk-off move in stocks was echoed elsewhere in markets, with prices of government bonds and other safe-haven assets rising. Ten-year US Treasury and German Bund yields, which move in the opposite direction of prices, have declined by 15-20 basis points. The US dollar, the Japanese yen and gold have risen modestly.

In more risky segments of the bond market, credit spreads widened. Emerging-markets debt, however, widened less than global high-yield bonds. This is likely due to the stretched valuations present in the high-yield market. Investment-grade corporate bond spreads were largely unaffected.

What should investors do?

While we continue to see little risk of a recession, it could be that the coronavirus exacerbates the low growth environment that we expect for 2020, and that there is even more of a slowdown in the first half of the year than we expect. If this occurs, we believe that the expected pickup in the second half of the year will then be stronger. We are therefore making no adjustment to our global economic forecasts at this time.

Our growth assumptions and market reactions are based on the pattern seen during the Sars outbreak. Using this case as a baseline, we expect that market volatility will continue to be elevated, but that there will be little long-term economic or market impact. The risk to this assumption is that the coronavirus spreads more widely than the Sars outbreak, which is increasing market volatility.

The ABN AMRO Investment Committee advises clients to steer away from adjusting their stock portfolio allocations at this time. This guidance reflects the late-cycle environment, the increasing possibility of a correction, overbought conditions and a lukewarm growth outlook. The outbreak of the coronavirus in China adds yet another level of uncertainty. We therefore continue to believe that the correct course is to sit tight and not take any actions in the current volatile market.

For more information, read the ABN AMRO Global Insight, “The coronavirus and the global economy,” 27 January 2020.

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