20 MAR


Asset Allocation , Topics

Increasing coronavirus cases outside China make markets tumble


European equities: Rough month

European equities had a rough month. Although they started out strongly, shrugging off concerns about the coronavirus story, the increases in cases outside China led to a sharp sell-off at the end of the month.

The outbreak in Italy caused the country to cancel public events and impose a shutdown in the north and a travel ban across the entire country. As a result, investors worried about industrial productivity, as the north is the country’s most dynamic region. Investors also worried about the tourism activity.

Utilities and Consumer Staples were the best performers throughout the month. The coronavirus continued to cause a flight to safety in favour of the Healthcare and Utilities sectors. Moreover, bonds rallied as the virus spread. Mechanically, Financials underperformed as economic activity slowed down. In addition, the worst performer was Energy, due to the oil-price fall.

We increased our exposure to Household & Personal Products as the sector, even though under-owned, is rather attractive. We neutralized our grade on the Healthcare sector in view of the exceptional health situation. We are keeping our strong overweight exposure on retail banks based on very attractive valuations and a good profitability trend despite the low interest-rate environment. We are also keeping our underweight on insurance, as US treasury yields have collapsed. Finally, we are keeping our slight overweight on energy, as current stock prices are already discounting the longstanding low oil prices.



US equities: Massive sell-off triggered by the COVID-19 spreading outside of Asia

Markets started out very strongly in February, shrugging off concerns about the coronavirus epidemic. However, the increases in cases outside China led to a sharp sell-off at the end of the month and to the worst week for financial markets since the Global Financial Crisis.

US equity markets had a rough month, although they started out strongly – shrugging off concerns about the corona virus story and rising to new all-time highs. The outbreak that started in China was largely ignored by markets (which continued to rally and reach highs) until the impact showed itself in a more substantial way, with Apple lowering its earnings guidance and HSBC missing its profits and announcing job cuts. A massive sell-off was then triggered as the virus spread outside of Asia very quickly.

Earnings delivery was stronger than what had been expected by consensus at the start of the quarter. The US saw positive earnings surprises, to the tune of 5%. Encouragingly, blended EPS growth for the S&P 500 inflected higher and has moved into positive territory. In addition, the proportion of US companies beating sales estimates rose sharply this quarter. On the other hand, in view of the exceptional market environment, we can expect a very poor Q1 2020 season.

The consumer staples sector was the best performer throughout the month as concerns over the coronavirus boosted defensive sectors. The energy sector sharply underperformed, due mainly to the new oil war between Russia and Saudi Arabia.

We decided to increase our Information Technology exposure due to attractive valuations and strong long-term convictions regarding disruptive technologies. We also increased our Communication Services exposure based on attractive valuations, while regulatory constraints are no longer a top priority, given the current economic context. We are now underweight Industrials, mainly in companies exposed to the energy sector due to lower oil prices.



Emerging equities: Coronavirus epidemic continues to spread

Investor euphoria on global equities in January was negatively affected by concerns of a global growth slowdown, triggered by the spread of the Coronavirus epidemic.

Risk assets (led by growth-sensitive assets) plunged, with global equities declining 10% in the last week of February – their worst weekly decline since the Global Financial Crisis. As the pandemic rippled across the world, investors sought safety in bonds, bringing down the 10-year US Treasury yield.

Emerging Market equities, which had already taken a hit last month, outperformed DMs in February. Although all EM sectors ended the month in the red, defensive and rate-sensitive sectors fared relatively better, while Energy lagged. Asia ex-Japan was, relatively, the best-performing region in the world during the month, while its commodity-heavy peers, EEMEA and LatAm, registered their biggest monthly losses since 2012 and 2018 respectively.

Asia ex-Japan: China was the only country to advance in February, as the virus outbreak seemed to have peaked in the mainland early on in the month, while Korea reported a spurt of new virus cases. India relented from announcing any major fiscal stimulus in its annual budget, while political uncertainty weighed on Thailand and Malaysia.

The slump in crude oil prices due to expectations of weaker demand adversely impacted Russia and Poland, while Turkey and Greece suffered from the fall in their respective bank stock prices.

All regional countries in LatAm – led by index heavyweight Brazil – corrected sharply, with consensus 2020 EPS growth estimates for the region falling over the month.

We remain constructive on Chinese stocks as the government is rolling out policy support. A series of rescue measures had been announced to support growth. On the monetary side, PBOC cut reverse repo by 10bp in February. On the fiscal front, supports were rolled out in the form of targeted tax cuts/fee reductions, the waiver of social security contributions for enterprises and relaxed unemployment benefit criteria.

Although we remain neutral Brazil, we are still rather optimistic about the country’s prospects. We are focused on self-help stories across different industries that are benefiting from a nascent economic recovery in the country boosted by all-time low interest rates.