SINGAPORE (Feb 7): In spite of the novel coronavirus contagion, which continues to spread and claim lives, equity markets are starting to recover.
A case in point is the US equity market, which has shrugged off its recent plunge. From having declined to a year-to-date low of 3,225.52 points on Jan 31, the S&P 500 index has rebounded 3.4% to close at a new all-time high of 3,334.69 on Feb 5.
In contrast, crude oil prices have continued to trade lower on the back of a projected fall in demand. The Brent and West Texas Intermediate crudes are both down about 16% year-to-date, respectively, to trade at US$55.46 ($76.78) and US$51.29 per barrel on Feb 6, despite a minor rebound.
“With the falls in the commodity market clouding my better judgment and pushing the markets’ fear index through the roof, the [S&P 500] has been unyielding in its propensity to consume virtually everything the market can throw at it, including the kitchen sink. If war, the mutant black plague, or even with half of China going underground hasn't knocked the S&P 500 off its high horse, I'm not sure anything will,” says Stephen Innes, chief market strategist at AxiCorp, in a Feb 5 market commentary.
In China, where the outbreak originated, the stock market has also registered some recovery, though it is down 4.8% year-to-date. In particular, the CSI 300 index climbed 5.7% to 3,899.78 points on Feb 6, from a year-to-date trough of 3,688.36 points. The Chinese stock market had lost some US$720 billion when it reopened on Feb 3. The stock market had been closed since Jan 23 in an attempt to mitigate the fallout from the coronavirus outbreak.
Similarly, the Straits Times Index has regained some lost territory. It closed at 3,231.55 points on Feb 6, up 3.7% from a year-to-date low of 3,116.31 points on Feb 3. The gains were mostly seen in property and banking constituent stocks. The benchmark index is up 0.3% year-to-date.
“With Wall Street performing so impressively overnight, Asia will inevitably follow suit, in a collective sigh of relief from behind their N95 masks,” says Jeffrey Halley, senior market analyst, Asia Pacific, Oanda, in a Feb 5 market commentary.
Meanwhile, the rally in gold prices has lost some steam. Although the precious yellow metal is down about 1.5% to trade at US$1,565.92 an ounce on Feb 6, it is still up about 3.2% year-to-date. Gold has been on an uptrend as geopolitical and economic concerns intensified.
Given that a vaccine for coronavirus has yet to be found, is the recent optimism reflected in financial markets justified? Or is the worst yet to come?
Lower growth expectation
According to a Feb 5 report by the World Health Organization, Belgium reported its first confirmed case of the coronavirus. As at press time, there are now over 28 countries and territories affected by the coronavirus, with more than 28,000 confirmed cases, the majority of which are from China. The death toll has now reached more than 560.
Moody’s Analytics warns that the coronavirus is mounting a “serious” threat to the “fragile” Chinese and other economies. “It is hard to handicap how broadly the virus will ultimately spread and how virulent it will be, but it has already become highly disruptive to China and increasingly to the rest of Asia. The US will not be immune to its ill effects,” says Mark Zandi, chief economist at Moody’s Analytics, in a February report.
Moody’s Analytics notes that large areas of China are under quarantine, affecting about 60 million people. Much of the rest of the populace has been told not to go to work and to stay in their homes, it adds. Moreover, travel to and fro China from the rest of world has been severely curtailed. It points out that most global airlines have stopped flying to China.
DBS Group Research reckons the economic shocks to mainland China brought by the coronavirus are likely to be two-to-three times larger than that of the SARS outbreak in 2003. This is because the deepening of physical interconnectivity both within and outside China ever since has increased “substantially” in the past 17 years. As such, DBS has forecast the world’s second largest economy to register real GDP growth of just 5.3% this year, lower than its initial projection of 5.8%.
What does this mean for other economies? Assuming the epidemic remains mostly contained within China and only isolated cases are reported globally, Fitch Solutions estimates growth in emerging Asia would slow to 5.4% this year, from 5.7% last year. On the other hand, the region as a whole would slow to 4.0% this year, from 4.3% last year. This is because China accounts for approximately 70% of growth in emerging Asia, and close to 80% of intra-regional Asia-wide travel, while receiving close to 40% of total exports of goods in Asia, it says.
The US economy will also take a hit. According to Moody’s Analytics, the world’s largest economy is projected to register real GDP growth of 1.7% this year, just below its 2% potential growth rate. This is due to a decline in Chinese tourists to the US and lower US exports to China as a result of weaker Chinese demand.
What about Singapore? Maybank Kim Eng expects the city-state’s growth to contract about 1% from a year ago. This will likely come from lower activity in manufacturing, retail trade, transport, hospitality and business services, mirroring the SARS episode, it says. However, the brokerage expects growth to rebound in 2Q2020, assuming the outbreak is contained and governments relax border controls.
In any case, the Monetary Authority of Singapore (MAS) says there is “sufficient room” within the policy band to accommodate an easing of the Singapore dollar nominal effective exchange rate (SGD NEER). For now, the central bank is keeping its monetary policy stance unchanged, in a statement on Feb 5.
The last time MAS had made a change was to reduce slightly the rate of appreciation of the SGD NEER policy band in October last year. It notes that the currency gauge has been fluctuating near the upper bound of the policy band since then. “There is therefore sufficient room in the band for the SGD NEER to ease in line with any weakness in the Singapore economy in the coming months,” MAS said.
Maybank KE thinks that an easing of monetary policy is unlikely to happen. “We are not expecting a technical recession and do not expect the MAS to ease the slight appreciation stance at the April meeting,” Maybank KE economists Chua Hak Bin and Lee Ju Ye say in a note dated Feb 5. “A manufacturing and export recovery may materialise only in the middle of the year.”
Investment entry points
So what should investors do? Amundi Asset Management says that the excessive downward setbacks in prices could provide entry points for asset classes with attractive valuations and good fundamentals. This is assuming that the elevated uncertainty does not derail the global economy into a “shock”, it says.
In particular, Amundi sees selective opportunities in emerging market (EM) equity given the reacceleration of earnings growth, attractive valuations and the prospect of a weaker US dollar. “The short-term issue due to the Chinese situation is an opportunity to add to this asset class, barring any disruption to the global outlook,” say Amundi group chief investment officer (CIO) Pascal Blanqué and deputy group CIO Vincent Mortier in a Jan 29 report.
The Bank of Singapore (BoS) has “overweight” positions on Europe equities and EM high yield bonds. BoS says the former offers more attractive risk-reward versus regional peers, while the latter has “firm” bottom-up fundamentals and broad support from the market’s search for carry. The bank, however, has a “neutral” position on Asia equities excluding Japan.
Interestingly, DBS CIO Hou Wey Fook sees opportunities in Chinese equities. He favours China banks given the central bank’s flexibility to adjust monetary policy to support its enormous domestic economy and spur consumption. China banks have also consistently strengthened their balance sheet and Tier 1 capital adequacy ratio, which has risen to a historical high of almost 12%.
Hou also favours Chinese e-commerce stocks. This is because online spending has become a new retail trend in China and the penetration to total retail sales will continue to expand, he says. Against this backdrop, the e-commerce sector will be less susceptible to short-term economic jolts and we expect it to emerge as a long-term winner. “In the medium to short term, e-commerce sectors could see an increase in online transactions,” he says in a Jan 28 report.
