Four more weeks of worry?

At 23:01 this evening, the UK will be outside the EU. Whilst there will not be an instant and noticeable change, monitoring developments in trade negotiations over the next months will be important.

Global equity markets were down by roughly 1% on the week but global equities are still positive, just, for the month to date. The story so far this year is: an improving economy on the one hand and, on the other, concerns that the new coronavirus derail the improving economy. First to the economy and then to the virus.

Positive noises for the future

The Goldman Sachs leading current activity indicator for the world economy is up to 3.4%, the strongest since late 2018. The global consumer has remained strong and now it feels like investors are getting better news on the global manufacturing cycle too. Individual companies, which are bellwethers for the global economy, such as Samsung made positive noises about the future this week. So far so good, but then the coronavirus came along and is asking questions of the global economy.

Downgrades for China

China is now much more important to the global economy than it was back in 2003 during the SARS crisis and analysts have already posted the first GDP downgrades for China. Yesterday, ANZ Bank lowered its first quarter Chinese GDP growth estimate to 5% from 5.9% previously. Indeed, some people now think that the first quarter China print might even be below 5%. A lot will depend on whether factory shutdowns extend beyond 10th February and expand in breadth and depth by geography and industry. In just a few days the Chinese have gone from declining an offer of US assistance, to now calling the US and asking for CDC officials and scientists to come and join the fight.

However, most investors are still working on the assumption that the various authorities will ultimately get a handle on this virus. If this holds true then it is worth repeating a note from Goldman Sachs, which found that the panic effect generated by epidemics has put sizable pressure on risky assets and that typically it takes an average of four weeks for the US equity market to start recouping losses.

Furthermore, from a macro standpoint, 2020 is such a crucial year for China and Xi’s goal of reaching the target of doubling GDP over the past 10 years. Once there is a handle on this virus and some semblance of control is reached, it could be expected that economic stimulus would be quite vigorous to defend the approximate 5.8% GDP growth needed to achieve this goal.

At this point it is probably most realistic to picture the situation as a very large exogenous shock to Chinese and world growth, analogous to the Japanese earthquake of 2011. However, this is happening to a much larger economy and leading to an extraordinary V-shaped crash and recovery in global industrial production momentum. Regarding the effects on other countries, Goldman Sachs forecast the virus to drag down full year 2020 US GDP growth by less than 0.1%.

© 2019 GWM