After a stellar 2019, risk assets began the first quarter of 2020 on a sound note, with market optimism propelled upon the signing of a ‘phase one’ trade deal between the US and China on 15th January which pointed to the suspension of previously proposed tariff increases. Whilst there were ongoing concerns about the high price earnings multiples of stocks, particularly in the US, and with the pace of new job creation slowing, economic fundamentals pointed to continued earnings and sales growth, supported by accommodative central banks. Indeed, the US economy grew at an annualised pace of 2.1% in the final quarter of 2019, the non-manufacturing purchasing managers index (PMI) climbed to an expansionary 55 and consumer confidence was rising. Even a brief flare up in tensions between the US and Iran failed to dent the mood. Europe enjoyed similar data reports, with upward revisions to both manufacturing and services PMIs, and UK employment up 208,000.
Towards the end of the month, though, volatility picked up upon concerns over the coronavirus outbreak in Wuhan, China, with the turn in sentiment leading to a shift towards safe havens. Capital flows into the US Dollar and the Yen were accompanied by a move into government bonds, which subsequently outperformed equity markets. US Treasuries and Euro government bonds returned 2.4% and 2.5% (in local currency terms) respectively in January, whilst US equities finished the month flat overall. Being the epicentre of the coronavirus outbreak, emerging market equities (China accounts for about 30% of the index) fell 4.7% in US Dollar terms.
Nervousness continued into February as coronavirus concerns replaced trade as the main focus for markets. Western firms reliance on functional supply lines from China came to the fore and the virus’ potential impact on global growth began to be recognised. The expectation of further monetary policy support from central banks around the globe sent core government bond yields lower (and thus values higher). Meanwhile, equity markets focussed on the better-than-expected fourth quarter 2019 US earnings season, as well as improving business surveys from January and upticks in European employment figures. They also took comfort in the trajectory of previous localised viral outbreaks such as SARS, and didn’t react meaningfully to COVID-19 until much later in the month when the full horror of the virus unfolded in northern Italy.
To view the full commentary from Sandaire’s Chief Investment Officer, StJohn Gardner, please click below to read more on 2020 so far, the impact of Covid-19, StJohn’s 2020 outlook and a summary of the markets at this time.
Investment Office First Quarter Update 2020