MARKET WATCH: Feb. 28, 2020
Investment Strategy
China’s slowdown threatens global economic growth. Risk assets gapped lower to begin the week and remained under pressure as new cases of the coronavirus (COVID-19) were announced in Asia and Europe. The outbreak has already caused considerable disruption in and around China. An epidemic-induced slowdown in China’s economy, which approximates 16% of global GDP, could have a more significant and lasting impact on the global economy than the SARS outbreak did in 2003, when China represented a mere 4% of global GDP. Notwithstanding its short-term effects, COVID-19 will act as a transitory drag on the economy if evidence and history are any guide. Any deceleration in growth will likely dissipate as the outbreak is contained, resulting in an extension of the business cycle beyond the second half of 2020 amid accommodative monetary and fiscal policy. In the near-term, sentiment will likely remain depressed, and deteriorating investor confidence may continue to weigh on government bond yields, lift demand for U.S. dollar-denominated assets and support capital flows into haven currencies and investments.
The outbreak has disrupted industries that rely on Chinese manufacturers for final and intermediate goods, and domestic demand in China has been impaired by quarantines and a material decline in business operations. Global inventories, which had been drawn down in 2019 on the back of trade policy uncertainties, will likely be depleted and subsequently restocked when the outbreak subsides. In recent weeks, earnings estimates have been revised modestly lower. Given lingering concerns about the virus and the potential for supply chains to be further burdened, we expect further negative revisions in the coming quarter. At the moment, however, U.S. corporate earnings are still expected to rebound meaningfully in 2020, with consensus estimates implying YOY growth of ~11% by the fourth quarter. We expect financial market volatility will remain elevated in the near-term, underscoring the benefits of a disciplined and patient investment philosophy that prioritizes diversification and risk-adjusted returns.