More central banks around the world cut interest rates (including the Federal Reserve and European Central Bank) in 2019 than in any other year since the global financial crisis (GFC) of 2008–09, and there were some welcome signs that further cuts in global economic growth estimates might not be necessary. Despite attractive valuations compared to bonds and inflation expectations, our assessment suggests there are now fewer things that can “go right” for equities over our 6–12 month investment horizon.
The developing novel coronavirus (nCoV) global health emergency is a new uncertainty and is causing an immediate, substantial decline in economic activity in China and across Asia. This impact will continue for weeks (at least) or months (more probably), and will potentially wreak havoc among many companies’ supply and distribution chains. GDP growth in China could drop substantially in the current quarter, but is likely to rebound with help from monetary and fiscal stimulus programs, which we expect would be well-received by risk markets. Other central banks—including the Fed—might also stimulate if global growth wanes. The United Kingdom has left the European Union (EU) and the Phase 1 trade deal between the United States and China has been finalized. Neither event signals an end to policy uncertainties in these negotiations or even the beginning of the end. Perhaps instead—as Winston Churchill famously observed—it’s more like the end of the beginning.
Current Six-to-Twelve Month Global Market View
The human toll of the nCov outbreak in China and other countries around the world has the potential to increase, with a commensurate negative effect on global economic activity. However, the policy response to this crisis—combined with an eventual slowing in the spread of infection—could fuel a significant rebound. Growth should continue in diversified economies where the number of cases is minimal, although the multinational businesses domiciled therein would still be exposed to impacts on their local operations and third party suppliers in affected countries. China’s share of global output has risen significantly since the SARS outbreak of 2002–2003 and supply chains are far more complex today, making production disturbances more likely. China’s importance as a destination for global products has also greatly increased over this timeframe. Economies in Europe and Japan, which have been struggling to recover their potential since the GFC, could be more vulnerable to economic disruption than the US as a result.
The preceding is an excerpt from our Changes to the Market Forecast
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Originally published on 14 February 2020.
All probabilities reflect rounding.
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