Fear is the only market narrative at present as new cases pop up outside of China with infections reported on every populated continent on the planet. Stories of a woman in Japan becoming re-infected with the virus having previously “recovered“ in early February and cases of random infection with no known obvious direct exposures in Germany and the US are not providing any optimism that this new pathogen is under any sort of control. This is clearly turning into a true leftfield market risk event that some people thought might happen and now represents the sharpest fall in markets since the financial crisis.
Equity exposure is getting kicked hard by the markets – there is not really any absolute defence in equities – and even bond proxy sectors are getting hit hard. Exposures to higher cash weights, bonds and other non-directional market investments, such as gold, have clearly helped cushion some of the more aggressive falls.
The outlook is very difficult to call with much certainty; the market appears to be in a fire and forget mode, with investors dumping first and asking questions later. This might feel the best course to take but inevitably we do not believe it is the correct one. If the recovered cases continue to rise (and they remain truly recovered) then right now we are just short of more people having recovered than still being infected, 36,636 versus 44,211 at present. What we can expect is that there will be a sizeable shift down in global growth this quarter which will no doubt drag into Q2 – supply side issues leading to global supply chains becoming impacted will likely lead to lower purchasing managers’ index (PMI) numbers and lower overall business activity.