As the coronavirus enters its phase of accelerated contagion and mortality, the equity markets have made efforts to catch their breath a bit this week.
Quite apart from the concerns that come with any pandemic, this virus is crystallising all our fears about the Middle Kingdom: 1) public health conditions that remain fragile despite unprecedented technological and social advances over the last twenty years, 2) the transparency of information that is impossible to verify and 3) in ability to influence the course of the world economy through globalisation. History often repeats itself. The Spanish flu that decimated the world’s population in 1918 could, according to some theories, have originated in China. The chain reactions being implemented to contain the virus (the closing of China’s border with Russia, suspension of airline companies’ flights to China, tourist travel bans, quarantining, etc) are likely to impact macro-economic growth in the first quarter. This will result in airlines and the luxury goods industry publishing average quarterly results. Despite this, no-one is yet predicting a global catastrophe, in spite of an outbreak of fever on the equity markets last Monday. In fact, volatility indices have risen sharply, in particular the VIX, which increased from 12 to 17. They had also fallen too low at the end of 2019. Publications of annual performance, however, demonstrated a certain degree of optimism (Apple, Tesla, LVMH, etc.). Others, such as Facebook and Siemens Gamesa were disappointing.
Without over-dramatising, Bernard Arnault, the Chairman and Chief Executive Officer of LVMH, admitted, on publication of record annual results, that there would be significant ramifications if concerns about the virus were to persist. More interestingly, he also expressed surprise regarding negative interest rates and fears that an economic crisis would occur in years to come (although he ruled this out for 2020). As a symptom of this interest-rate disease, the Greek 10-year rate fell below that of the US this week. Nevertheless, Greek sovereign risk appears to be more significant that US sovereign risk, but monetary policies seem very mysterious these days. The Bank of England did not lower its rates at its recent meeting. Are interest rates on the verge of stabilising before they increase? It is too early to say as, for now, investors’ attention remains firmly focussed on the situation in China.
Igor de Maack, Fund manager and spokesperson at DNCA. This article was finalised in January 31st, 2020.
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