Over the past few days, investors’ attention has quickly shifted from COVID-19 new infections to whether the US, Europe and the UK economies will slide into recession or not. Market dislocations continue to unfold, with US stocks hitting 2 circuit breakers in one week.
Although financial conditions have recently tightened, central banks from around the world have deployed dramatic easing monetary policies such as the Bank of England’s emergency rate cut and the Federal Reserve’s promise to inject USD 1.5 trillion of liquidity into the market, investors have been unmoved.
Market confidence will only slowly start to return when either the peak of infections has passed in the US or when the White House announces significant fiscal stimulus measures to counter the negative economic impact arising from the COVID-19 and help targeted industries and workers who have been affected. President Trump’s address to the nation yesterday did not deliver what the markets wanted – in fact, it only added anxiety to the markets since his only concrete plan was extending a travel ban to foreigners arriving from Europe.
What should investors expect?
Investors can continue to expect market volatility in the near-term, with negative news flow on the COVID-19 coming from the US and Europe, oil price fluctuation and a slowing global economy. The WHO recently declared a global pandemic, as the virus enters its escalation period in the US, with more than 200 new daily cases and Italy with 2,000 new cases. Despite the market gyration, all is not lost. Overall, lower oil prices could bode well for global growth, especially in many Asian countries such as China, India and South Korea which are large oil importers.
In China, the number of daily cases continues its downwards trend, on 10th March the country recorded only 10 new cases. Chinese economic activity is slowly starting to return, as measured by the work resumption rate across the board.
We continue to expect an extreme ‘risk off’ environment with investors flocking to ‘safe haven’ asset classes such as US Treasuries, the yen and gold. Our view is that we will continue to see a high level of volatility.
What could volatility mean for investors?
Investors could benefit from being tactically long volatility for the longer run. In volatile times such as this, investors should remain well diversified with adequate exposure to risk assets.
Within stocks, we favor Chinese and EM Asia equities, given our view that earnings will likely recover first in this region. Valuations for Chinese and EM Asian equities remain compelling on both a historical and comparative level despite the Chinese equity markets already bouncing back as one of the best performing indexes in the world.
Within fixed income, we continue to favor Chinese and EM Asia investment grade debt (USD- denominated) as yields remain positive especially when compared to developed market sovereigns and IG debt.
Market drawdowns typically don’t just happen for no apparent reason; they are the result of economic and/or policy uncertainty. The outbreak of the coronavirus and the potential “cure” for the virus - shutting down large segments of the economy - is more than enough economic uncertainty to warrant a market drawdown.
We tend to believe that we live in the most uncertain of times, but we do not. We will get through this as we have gotten through each of the past crises of our time and throughout history.
In the period from 1998-2018, we experienced the tech wreck, a terror attack, a global financial crisis, the European debt crisis, Brexit, and many infectious disease scares (H1N1, SARS, Ebola, and MERS) and the S&P 500 Index still climbed 7% per year. A $100,000 investment in the market in 1998 would today be worth over $400,000.
Think long term and stay the course
David Chao is Global Market Strategist for Asia Pacific at Invesco.