Trade tensions have been replaced with investors’ concerns about the potential economic implications from the coronavirus outbreak that originated from 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. Macro data downside for the first few months of the year can be expected and especially so in Asia. Market uncertainty will not be helped by coronavirus cases being detected outside China in places like Korea, Japan, Iran and Italy. 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 at multi-decade lows, providing the confidence for consumers to spend take-home pay.
Second, the manufacturing cycle has turned a corner after reaching a low point last July. With the level of inventories running at low level and new orders picking up, there is room for factory output upside.
Third, benign inflation enables policy makers to run accommodative monetary and fiscal policy. In his recent semi-annual monetary policy report to US Congress, Fed Chair Powell warned that the emergence of the coronavirus “could lead to disruptions in China that spill over to the rest of the global economy”. Against this backdrop, expect major central banks to sound dovish in their guidance on interest rates. Since central banks have warned that they are coming up against limits of what monetary policy can do, expect fiscal policy to provide another lever to stimulate global growth.
On balance, our base case view is that detected cases of coronavirus, which seems to be an extreme form of viral flu, should peak when the weather warms up. So while there is plenty of uncertainty over the recovery trajectory following the coronavirus in China, whether it could be contained and its impact on supply chains, with additional central bank stimulus we continue to believe that the global economy and company earnings are sufficiently resilient to mitigate against these headwinds. Consensus forecasts show forward Earnings Per Share (EPS) growth, as represented in the MSCI All Country World Index, to rise by 9.3% over the next 12 months*, down only slightly from the start of the year. Provided company earnings hold up, this should put a floor on the overall equity market.
*Source: Refinitiv Datastream, data as at 26th February 2020
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of publication.
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