Here is another collection of commentaries from wealth managers and investors about the virus outbreak and how it influences asset allocation and risk management strategies. Already, there appears agreement that the economic effect is likely to exceed the 2003 SARS episode.

As authorities in China continue to wrestle with the coronavirus outbreak, prompting travel and other disruptions and closures, we continue to track how wealth managers view the situation. To take one example of business disruption, The Bank of East Asia late last week said it was shutting 20 of its branches starting from 1 February until further notice. Economists are trying to work out how all the closures will hit Chinese and wider gross domestic product, company earnings and markets. 

This publication welcomes any analysis of how the crisis will affect investment and wealth planning strategies in coming months. Email tom.burroughes@wealthbriefing.com and jackie.bennion@clearviewpublishing.com

Dave Lafferty, chief market strategist at Natixis Investment Managers
Without any relevant history, investors will map the spread and consequences against the SARS outbreak in 2003. This may be a poor template as both China and the rest of the global economy look very different 17 years later. One week in, the economic damage from the outbreak is already beginning to accrue: cancelled flights, quarantined cities, factories closed, and events postponed. For now, the economic loss has largely been contained to China, but it is likely that it will ripple out in the coming weeks.

Most of the economic damage from outbreaks comes from deferred consumption. Most, but not all, of the activity will catch up. How much of the loss is temporary versus permanent will depend on how long the crisis lasts.

The outbreak is hitting China at an inopportune time. Growth in China is naturally slowing, but at a very natural and managed rate. With China only growing by 6 per cent, an outbreak that shaves 1 per cent -2 per cent off GDP (annualised) represents a serious headwind. Again, how much of that economic loss will be recovered depends on how long and how severe the outbreak is. If policymakers and health officials can’t slow the spread, -2 per cent could prove optimistic. (Again, at an annualised rate).

If economic growth slows significantly, the big policy tools are ill-fitted for the job. Monetary policy acts with a significant lag and longer fiscal spending is not well suited to addressing a slowdown that might only last a few months. While healthcare workers scramble and work overtime, policymakers can do little except provide liquidity and watch.

We expect the recently inked Phase 1 Trade deal to have little meaningful impact on China, so the headwinds from the outbreak won’t offset the gains. We’re sceptical that there will be gains to offset. The outbreak looks like a net loss.  

We expect the economic damage to centre on China and radiate out from there. The market seems to agree as the Hang Seng index is down by over 6 per cent since the outbreak while the S&P 500 and Eurostoxx 50 are down by less than 2 per cent. Markets in the US and Europe are on alert, but they are not yet panicked. Fed Chairman Powell referenced the outbreak, but US markets seem unfazed. The Fed has plenty of ammo in the near term if the outbreak becomes a greater headwind to US growth. We’ll find out tomorrow if Mr Carney at the BoE [Bank of England] feels the same.

For now, we see the coronavirus outbreak as a brief and modest shock to global growth - one that is unlikely to derail the broad economy in 2020. Investors should be on the look-out for long-term values if equity weakness continues.

The outbreak is perhaps a convenient excuse to take gains in markets that were significantly over-bought in early January, but for now, the outbreak is unlikely to be the knock-out punch for this 10-year bull market.

DBRS Morningstar
While it is still too early to ascertain the economic impact of the virus on China, given the speed at which the infection has spread, the impact is likely to be felt most in the first quarter. Consumption, especially retail sales, is likely to be affected as people across the nation limit their activities outside their homes. To a lesser extent, production will also likely be affected temporarily by the extension of the holidays, as well as by possible subsequent precautionary workplace measures to contain the virus. 

The spread of the coronavirus has prompted companies to limit their travel to China, which will affect hotels, restaurants and transportation. Hong Kong and other regional hubs for tourism (e.g., Thailand, Macau) are likely to see an even larger impact.

China’s increasing share of the global economy coupled with its growing integration in global supply chains means a slowdown in China stemming from the virus could have a larger spill-over than in the past. Back in 2003, when SARS hit the Chinese economy, the global fallout was limited. The country’s weight in global growth at that time was a modest 4 per cent, compared with the 17 per cent share of global GDP today. Fears surrounding the outbreak may cause a behavioural shift and impact travel and tourism globally. Chinese tourists have driven sustained growth in travel across Asia, having increased from 2 per cent of the total number of tourists in 2002 to 9 per cent in 2017. Global central bankers have also voiced their concern: the Federal Reserve in its January meeting stated that the coronavirus outbreak posed a risk to its economic outlook for the US in the short-term, via a China slowdown that could spill over to its trading partners.

In addition to measures to contain the virus, monetary and fiscal policy measures are likely to be used as necessary to provide liquidity and credit support to mitigate any lasting impact on growth. Earlier this week, the People’s Bank of China (PBoC) announced that in anticipation of an incoming liquidity shortage, it would provide sufficient liquidity support to support banks and businesses which were negatively affected. On the fiscal front, authorities could announce a bigger 2020 budget deficit in March, if the cost of fighting the epidemic is substantial. Even with strict containment measures and scope for monetary and fiscal response in China, DBRS Morningstar expects a negative pressure on growth in the current quarter.

If there is an effective policy response, the economic effects are likely to be contained to 1-2 quarters. However, it is too early to tell how quickly and how long the virus will continue to spread. DBRS Morningstar continues to monitor the Coronavirus situation for potential impact on its global sovereign ratings.
 

Mark Dowding, CIO at BlueBay Asset Management
Price action in global financial markets has been dominated by headlines surrounding the spread of the coronavirus during the past week. Notwithstanding draconian measures to close transport links and the mandatory wearing of masks in public places, there is no sense that the acceleration in new infections has yet peaked and there are growing fears that the number of cases outside of Hubei province are starting to escalate. 

With airlines suspending flights to China and businesses and factories extending shutdowns beyond the Chinese New Year holiday, it seems likely that Chinese GDP may be impacted by 1-2 per cent depending on offsetting policy measures designed to stimulate demand. In assessing how GDP in other countries is impacted by shutdowns from strikes or snow days, it is possible to see how activity may evolve – though it is clearly very difficult to predict how quickly and widely the virus may spread and what the resultant global implications will be. 

At a sectoral level, travel and tourism are obvious casualties. Elsewhere, shortages or bottlenecks could push inflation up in the near term. Looking further ahead, it appears that the low level of mortality rates to-date, with deaths concentrated among the old and the sick, should mean that even in the case of more of a global pandemic – from a statistical point of view, it may be that what we are looking at is a mortality rate which effectively doubles the number of those who would typically have died from seasonal flu. Were the rate of new infections to slow, it is tempting to think that markets would start to look beyond the coronavirus – as was the case when SARS reached containment in April 2003. 

However, for now it is difficult to fade risk-off sentiment in markets as we are dealing with a situation which is very difficult to analyse and is characterised by an unquantifiable, left-tailed risk distribution. In one sense it has felt that ‘green swan’ events would dominate thinking in 2020, based on the threats to the environment and a potential tipping point with respect to climate change. But what we are now facing is more of a ‘black swan’ in the form of global pandemic, which is, for the time being, at the front and centre of our thinking.

Citi Private Bank
Just when it looked as though all fear was vanquished in financial markets, risk assets have been hit by new worries over a global pandemic. In reality, the precautionary measures to arrest the spread of the Wuhan virus - such as travel bans - will drive the bulk of the economic dislocation. This is likely to centre in China, be severe, but temporary, as was the SARS crisis of 2003.

With a powerful rally in both US stocks and bonds of late, and Greater China markets posting a double-digit decline, we reduced our equity overweights in both the US and some Asia Pacific markets to add exposure in China/Hong Kong. We retain a small overweight in large cap US equities and a large overweight in USD fixed income, even with a global bond underweight centred in Europe and Japan.

World equities rallied by 15 per cent over the past five months to the recent high. While the lows of last summer represented unnecessary pessimism in our view, the very strong rally of the past month heading in the coronavirus scare showed signs of excess as well. With world growth dynamics unlikely to be derailed, and markets lurching suddenly and sharply, we held to our current asset allocation, which is 3 per cent overweight global equities and 4 per cent underweight global fixed income. 

Our overweights in US Treasuries, other high-grade bonds and gold have thus far mitigated declines in certain equity markets. (Diversifying across asset classes and regions is the “best medicine”).

Even before the “Wuhan flu”, financial market volatility seemed poised to rise. The Federal Reserve will transition away from temporary year-end liquidity boosting steps while still adding to its bond holdings for a time. This may result in bumpier short-term credit markets rather than “fine tuning.” Bond valuations have richened even during the equity run up through mid-January, making it harder to reallocate to fixed income.