News Flash | 28 February 2020

Since the middle of February, equity markets have been rattled by fears over the potential impact of the coronavirus on economic activity and on corporate earnings. Major indices have plunged by around 13% this week and one must go as far back as the financial crisis in October 2008 to observe a worse weekly correction, reflecting the severity and the velocity of the recent move; year-to-date performances of the major indices now range from – 6% (Nasdaq Composite) to -12% (Japan Topix). Market sell-offs are inherent to the equity asset class and historical analysis shows that these corrections have resulted in an average decline of 13% for the S&P 500  since WW2; to try to time such moves is a fool’s game and the latest sell-off has also likely been compounded by profit-taking on richly valued equities following a strong rally, technical selling and month-end rebalancing.

The current behaviour of markets is quite similar to the one observed at the end of 2018; they are being totally driven by sentiment and a self-reinforcing negative spiral appears to be setting in. We consider that they are becoming irrational as the ultimate fallout from the coronavirus is impossible to predict; the impact of this exogenous shock will impact economic activity in the first quarter severely but is likely to prove to be only temporary, like many times before.

We are fundamental long-term investors and are preparing to take advantage of attractive opportunities in a number of sectors and stocks that would result from an overshoot of this market correction; this would take our current neutral equity allocation to overweight. We are also paying particular attention to corporate credit in view of extended valuations and eventual unintended consequences and the uncovering of unknown issues due to leveraged balance sheets.

As always we reserve the right to change our investment outlook and to adjust our asset allocation according to the evolution of the situation and as governments and corporate leaders continue to react to the spreading of the coronavirus.