Fourth quarter 2019 corporate earnings reports have been obscured by headlines about the new coronavirus that recently began spreading from Wuhan, China. Global equities − as measured by the MSCI All Country World Index − have fallen by about 1.6% this past week but are up 0.4% so far this year (in US dollars). By way of background, it should be mentioned that some investors closed their positions ahead of the Chinese New Year holiday, which began January 25, and that we have had a lengthy and robust upturn phase in stock markets. So some profit-taking is no surprise. Last night Apple reported its strongest quarterly revenue ever. Today there are corporate reports from such companies as SEB, Telia, Boeing, Facebook and Microsoft.
Looking back at how the financial markets behaved when the SARS virus broke out in 2003, the reactions were rather short-lived at that time and the longer-term economic effects were limited. The mortality rate of the current virus outbreak seems to be around 2-4%, while that of SARS was around 10%. The World Health Organisation (WHO) has held off on declaring the new coronavirus epidemic a "public health emergency of global concern" (PHEIC), rather than a Chinese health crisis.
China extends Lunar New Year holiday
In China, stock exchanges are still closed due to the Lunar New Year holiday period, while the Hong Kong stock market reopened again this morning. Travel to and from a number of Chinese cities has been greatly restricted in order to reduce the spread of the virus. The Beijing government has also decided to extend the end of the national holiday period from January 30 to February 2. Economists' calculations of the potential impact of the virus will thus not only include reduced Chinese consumption and travel during and after the New Year holiday, but also the effects on manufacturing and − in turn − on first quarter gross domestic product (GDP) growth, since the total number of working days will shrink. It is difficult to estimate the economic consequences of the virus, but we can at least assume that Chinese growth early in 2020 will be impacted. For the time being, we are maintaining our full-year Chinese GDP growth forecast of 5.7%.
Remember that financial markets in such places as Australia, Hong Kong, China, South Korea, Malaysia, Singapore, Taiwan, Vietnam and New Zealand are also affected this week by regularly scheduled holiday celebrations related to the Asian New Year and national days.
Virus-related oil price decline
On December 31, Brent crude oil cost USD 66/barrel. Today it is trading at around USD 60. As the virus outbreak began, the US-based investment bank Goldman Sachs published an analysis maintaining that a "SARS-like" event could lower oil prices a few dollars. This is primarily due to uncertainty about how the coronavirus will affect overall economic growth. Meanwhile there are expectations of temporary cutbacks in travel, i.e. lower demand for oil-based motor fuels.
New guidelines for ECB actions coming this year
As expected, the European Central Bank (ECB) left the key interest rate unchanged at its January 23 policy meeting, but ECB President Christine Lagarde announced that during 2020 the bank will carry out a review of its monetary policy strategy − to be completed before year-end. The historical role of central banks is to combat inflation, which has been low during the past two decades. Aside from discussing its inflation target and how it should be measured, the ECB will also address other issues such as climate challenges and inequality. Considering how difficult it is even to influence inflation using monetary policy, it is possible that fiscal policymakers (who control national government budgets) have a greater chance of environmental impact.
Brexit agreement nears final approval
The British Parliament has approved Prime Minister Boris Johnson's Brexit agreement on the United Kingdom's withdrawal from the European Union, which will now face a vote in the European Parliament on January 29 before taking effect at the end of January. After that, difficult negotiations on a UK-EU trade agreement are expected.
Our market view
If growth holds, stock markets will hold
The power of the stock market rally late in 2019 created a positive momentum that may very well persist for another while. Continued extremely low interest rates and bond yields led to the acronym TINA (There Is No Alternative), which is considered to be one driver behind the rally. A closely related acronym is FOMO (Fear of Missing Out) – few investors want to be left standing on the station platform with low-yielding bonds in their portfolios as the stock market train roars past.
But there is no shortage of threats to this positive scenario. Right now the market is worried about the new coronavirus. In itself, the epidemic is of course a very unpleasant phenomenon, but from what may be a crass economic perspective its impact on global economic growth and thus on listed companies will probably be limited. Our assessment is that the market turbulence of recent days is also a result of the strong preceding period: profit-taking is no surprise. A more long-term risk is any obvious economic deceleration. Meanwhile the already subdued growth outlook suggests that corporate earnings will show only modest increases.
The report season on fourth quarter 2019 corporate results is under way. After the recent strength of the stock market, there is probably room for disappointments, but that risk is limited because forecasts for full-year 2019 earnings have already been lowered significantly. Earnings expectations for 2020 appear too high, however. Since most investors already assume that corporate earnings may end up below analysts’ forecasts, and considering the lack of alternatives to equities, the strong stock market has the potential to last for another while. Economic developments will then determine the stock market mood during 2020, probably seasoned with political surprises that can move the markets, especially in the short term. We anticipate plenty of fluctuations and drama, and we expect returns to be well below those of 2019, though slightly positive.
This week’s agenda
- • January 29 – United States, key interest rate announcement: We expect the US Federal Reserve to change neither its key rate nor its signals about the future.
- • January 30 − Bank of England policy meeting: Some financial market analysts expect a key interest rate cut; we expect the British central bank to wait until May before lowering its key rate.
- • January 30 – United States, 4th quarter GDP growth: In recent quarters, US growth has been around 2%. Our forecast for Q4 2019 is an annualised rate of 1.7%.
- • January 31 – Euro area, GDP growth and inflation: GDP is expected to grow by 0.2% compared to the preceding quarter, which is somewhat below the average since 2018. Core inflation is expected to fall marginally to a low 1.2%.
Please contact your private banker if you have any questions or concerns.