The potential for inflation shocks and stock market corrections top the investment agenda this month, with our expert wealth managers plotting careful - yet innovative - courses for their clients’ portfolios.
The coronavirus outbreak is rocking global markets and much more uncertainty lies ahead. But investors need to keep their cool and consider the fundamentals on a long-term view, wealth management experts from our panel explain.
The case is made for focusing on China’s fundamentals, not recent bad news
Investors are reminded the underlying drivers of output growth remain intact
A long-term view is encouraged as short-term shocks are inescapable
Some bank debt and undervalued UK equities are attracting attention
News headlines around the world are almost completely focused on COVID-19, its unconstrained spread and the rise of new disease epicentres in Europe and the US. It’s hitting financial markets hard and prompting panic, except among the most seasoned of investors who see the drop in markets as an opportunity to invest further.
The original source of the illness – China – meanwhile is giving the green light to travel and industrial production. In fact, its biggest problem now appears to be the challenge of getting goods to its global consumers. That’s because around half of global freight is carried in the cargo bays of passenger flights, numbers of which are dropping dramatically as the rest of the world chooses isolated staycations over holidays abroad.
China is a country that should definitely remain a key long-term focus for its future positives rather than the last three months of bad news
What fascinates me, however, is the future of China. China is the US 150 years ago. We are seeing the fall of the US empire and the rise of another – Chinese dominance seems to be clear to Trump and is probably the reason for the trade wars and his latest tweets that determinedly link COVID-19 to China. His retweet of a message from Charlie Kirk, the head of a pro-Trump organisation for college students, that brands the infection as “China Virus” is just the latest in the US government’s rhetoric against the country.
China, meanwhile, is focusing on its most important GDP driver: domestic consumption. In 11 of the 16 quarters since 2015, consumption has contributed more than 60% of GDP growth. Of the 120 companies that China has on the Global Fortune 500 list, more than 80% of their revenues are still earned at home.
China is a country that should definitely remain a key long-term focus for its future positives rather than the last three months of bad news.
Investment Counsellor at Nedbank Private Wealth
Trade tensions have been replaced with investors’ concerns about the potential economic implications from the coronavirus outbreak that originated in China. Global consumption is likely to be affected somewhat by travel restrictions to and from China. Given the expected downturn in Chinese economic activity from a government enforced lockdown on parts of the country. Mainland import demand is also likely to be a drag on global growth. However, we expect the global economic recovery that began last autumn to continue for three reasons.
First, the underlying drivers of output growth remain intact. Personal consumption, which accounts for the bulk GDP for Advanced Economies is supported by job creation. The unemployment rates in the US, UK, Eurozone and Japan are close or at historic lows, providing the confidence for consumers to spend take-home pay.
Second, although the global manufacturing survey data was depressed in February, due to the sharp slowdown in China from the coronavirus outbreak, there is room for factory activity to improve from here, supported by interest rate cuts and a step-up in China credit stimulus from last year.
Although the global manufacturing survey data was depressed in February, due to the sharp slowdown in China from the coronavirus outbreak, there is room for factory activity to improve from here, supported by interest rate cuts and a step-up in China credit stimulus from last year
Third, benign inflation enables central bankers to run incrementally easier monetary policy. In an unusual inter-meeting statement at the end of February, Fed Chair Powell signalled that the US could cut interest rates in response to “evolving risks” related to the coronavirus. Expect other major central banks to sound dovish in their guidance on interest rates too. Since central banks have warned that they are coming up against limits of what monetary policy can do, fiscal policy is also likely to provide another lever to stimulate global growth.
*Source: Refinitiv, Bloomberg, 3 March 2020
Chief Investment Strategist at Smith & Williamson Investment Management
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In the short-term the world is highly uncertain, whether due to politics, viruses or market crashes. This is why, as long-term investors, we are not overly concerned by market swings caused by factors like coronavirus.
Headlines recently have been dominated by growing concerns over COVID-19, which have battered investor confidence. With China and now parts of Italy in lockdown, it’s easy to become unnerved about what might happen. Research has shown, though, that while infection rates are in line with SARS, coronavirus is far less fatal.
The China lockdown is likely to slow Asian and global growth over the next few months, with firms like Apple and Hyundai revising earnings downwards due to manufacturing bottlenecks. But remote working practices have been adopted across much of China, while government and banks are ensuring company credit lines remain open in order to limit the downturn.
In the short-term the world is highly uncertain, whether due to politics, viruses or market crashes. This is why, as long-term investors, we are not overly concerned by market swings caused by factors like coronavirus
Equity markets shrugged off the coronavirus outbreak at first, with MSCI World gaining 3.8% from the start of February to the 19th. Then investors panicked, leading to some of the largest one-day drops in US equities since 2011, and the largest one-week plunge since the financial crisis.
With investors spooked by coronavirus and running for cover, bond yields have come down across the world. The 10-year US treasury yield has fallen from c.1.92% to 1.14% at month end, and UK yields have fallen from 0.82% to 0.42%. This resulted in the US Federal Reserve slashing interest rates by 0.5% on 3 March – the first emergency cut since the financial crisis.
Head of Investment Strategy at 7IM
We know from history that market moves like those seen recently are often overreactions, and the “snap back” can be just as fast on the way back up. So, we have been closely watching those areas of the market we believe will prosper when the inevitable turnaround comes. However, we are inherently cautious in our approach, and know that “trying to be the hero” can detract material value.
The coordinated interest rate cuts and government spending plans we have seen across the world have not been enough to calm markets so far, but fundamentally should support the global economy through this difficult time
The speed of the coronavirus outbreak has taken markets by surprise, but there have been bright spots in terms of the response from policy makers and central banks. The coordinated interest rate cuts and government spending plans we have seen across the world have not been enough to calm markets so far, but fundamentally should support the global economy through this difficult time.
In particular, bank debt supported by the ECB, and undervalued UK equities have attracted our attention, but we are mindful to wait until the time is right.
Director, Investment Management, at Arbuthnot Latham & Co., Limited
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