Review of the week: Fear spreads too

Fears spread around the globe along with new cases of coronavirus - numbers in Japan and South Korea are ticking up and there are several new clusters of infection in the Middle East and Italy. The 150 or so cases near Milan are causing panic in central Europe and 10 towns in northern Italy are being quarantined in an effort to contain the spread. Major equity markets in the UK and Europe fell sharply on Monday morning, with the FTSE 100 down 3.5% and Germany’s Dax down 3.8% at the time of writing. Investors have switched into defensive equities, and flocked to safe havens such as gold, US dollars and US Treasury bonds amid the virus’s spread.

Global recession fears are on the rise. Over the weekend, a meeting of finance ministers from the G20 group of the largest industrialised nations acknowledged the seriousness of the virus’s impact on the global economy and said they would take further action if the outbreak intensified. The IMF has lowered its 2020 forecast for Chinese GDP from 6% to 5.6%.

The number of reported cases has reached over 80,000 and, with a mortality rate of about 3%, deaths now total more than 2,100. Serious concerns remain about the accuracy of testing kits which reportedly correctly detect positive results only 20% - 30% of the time (although the range is between 10% - 50% depending on the hospital). A new study by scientists at Imperial College London estimates that two-thirds of cases exported from China have gone undetected worldwide.

Even if the authorities in China get the virus under control in the next month, hopes of a snapback in growth in the second quarter may turn out to be overly optimistic. We should brace ourselves as companies count the costs to their Chinese operations and first quarter earnings estimates are dampened. Already Apple has lowered its earnings guidance, while HSBC missed its profits and announced job cuts.

Investors remain confident that central banks will step in with stimulus if necessary to support their economies.  Talk of a global recession in 2020 may be premature, but we are at the end of a long economic cycle and growth was likely slowing even before the outbreak of the virus. We think a slowing growth environment is likely to favour equities that can continue to grow their earnings regardless of the broader economic conditions, while more economically sensitive shares and sectors could suffer.

Index

1 week

3 months

6 months

1 year

FTSE All-Share

0.0%

3.9%

6.3%

9.5%

FTSE 100

0.1%

2.9%

4.4%

7.9%

FTSE 250

0.0%

7.4%

14.8%

16.7%

FTSE SmallCap

0.2%

9.1%

12.4%

14.2%

S&P 500

-0.8%

7.6%

7.6%

23.0%

Euro Stoxx

-0.4%

2.6%

4.1%

15.1%

Topix

-3.0%

-3.8%

0.9%

6.3%

Shanghai SE

3.8%

4.4%

-0.9%

6.2%

FTSE Emerging

-1.1%

3.7%

3.6%

8.8%

Source: FE Analytics, data sterling total return to 21 February

The Trump card

The US election has been ramping up throughout February and all-important ‘Super Tuesday’ is just around the corner. The third Democratic primary debate of the month will be held tomorrow in Charleston, just days before the South Carolina primary (29 February).

Candidates’ performances onstage could play a critical role — in New Hampshire, many voters who made up their minds late in the race indicated that the debate right before the primary influenced their ultimate decision. Then on ‘Super Tuesday’ 3 March, 16 primaries will take place with 1,357 delegates to be won.

In our own analysis of US elections, the economy is the single best predictor of presidential elections we have come across. At the moment, our model of the economy’s impact on election results suggests that Trump will hang on to all of the states he won last time except Iowa, but, crucially, flip Colorado, Maine, Nevada, New Hampshire, New Mexico and Virginia to supporting him. Of course, the next three quarters of data are crucial – our current forecasts we simply use the latest three quarters.                                                                                                                               

The economy is the President’s ‘Trump’ card, but it might not stay that way. The US economy had already lost some momentum prior to the spread of coronavirus around the globe. The latest flash estimate for the services PMI (a measure of activity and confidence in the sector) hit a 76-month low of 49.6. Economic activity could well recover later in the year, but investment growth looks likely to stay weak and vulnerable to an unforeseen shock (e.g. rising oil prices, or worst-case-scenario coronavirus).

In the meantime we have the Democrat primary race. We’ll have a clearer idea on 3rd March, and it isn’t over until 6th June. November is still a long way away.

Bonds
UK 10-Year yield @ 0.52%
US 10-Year yield @ 1.39%
Germany 10-Year yield @ -0.50%
Italy 10-Year yield @ 0.96%
Spain 10-Year yield @ 0.20%
 

Economic data and companies reporting for week commencing 24 February

Monday 24 February

US: Chicago (Jan) and Dallas (Feb) Fed manufacturing indices
EU: German IFO index (Feb)
Full-year results: Bunzl, Reach, Ascential, Georgia Healthcare Group
Quarterly results: Dechra Pharmaceuticals

Tuesday 25 February

US: Conference Board consumer confidence index (Feb); Richmond Fed manufacturing index (Feb)
UK: Retail Sales (Feb)
EU: German final Q4 GDP; French business and manufacturing confidence (Feb);
Full-year results: Croda International, Derwent London, Meggit, Morgan Advanced Materials
Preliminary results: Hammerson

Wednesday 26 February

US: New home sales (Jan)
EU: French consumer confidence (Feb)
Full-year results: Capital & Counties Properties, Restaurant Group, UNITE Group, Rio Tinto, Serco Group, Weir Group, Law Debentrure Corp, William Hill, McColl’s Retail Group, International Personal Finance, Taylor Wimpey, Metro Bank, Avast
Quarterly results: Town Centre Securities

Thursday 27 February

US: Preliminary durable goods orders (Jan); Bloomberg consumer confidence (Feb); weekly jobless claims; pending home sales (Jan): Kansas Fed manufacturing index (Feb); Q4 GDP
EU: Eurozone M3 money supply (Jan), economic survey (Feb); Italian consumer confidence, manufacturing confidence and economic sentiment (Feb)
Full-year results: Vesuvius, WPP, Vistry Group, Genus, Provident Financial, James Fisher and Sons, STV Group, Hunting, McFarlane Group, Howden Joinery, National Express Group, RSA Insurance Group, Inchcape, Persimmon, St James’s Place, Rentokil International, Drax Group, Hikma Pharmaceuticals, Mondi, Playtech, Greencoat UK Wind, Evraz, Hastings Group Holdings, Bakkavor Group, Aston Martin Lagonda Global Holdings, Flutter Entertainment, British American Tobacco, Reckitt Benckiser Group, Georgia Capital, Standard Chartered
Quarterly results: Pantheon International, Amigo Holdings, Ricardo
Preliminary results: Grafton Group

Friday 28 February

US: University of Michigan consumer confidence (Feb); personal income and spending (Feb); wholesale inventories (Jan); PCE inflation (Feb); Chicago PMI (Feb)
UK: Consumer confidence (Feb); Nationwide house prices (Feb)
EU: Eurozone flash CPI (Feb); German unemployment (Feb)