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Heading into 2020, we felt that central bank policies in the U.S. and China would adequately support global growth, and my investment summary for 2020 was “Don’t worry; be happy.” Since then, the coronavirus outbreak occurred in China and spread, causing a global slowdown—a de facto recession. This slowdown is reflected in lower stock prices, lower commodity prices and historically low interest rates. Now, we are monitoring two separate coronavirus scenarios, one in China and one in the U.S., in terms of (a) the date of the peak coronavirus health impact and (b) the amount and length of economic slowdown.
China is ahead of the world from a recovery perspective and dealt with it in its own way. As could be expected, China’s official activity gauges for February were hit hard, with the manufacturing Purchasing Managers’ Index (PMI) falling to 35.7 and the services PMI to 29.6. The key now is to watch the pace of recovery and the extent of economic support, through monetary and fiscal channels. But economic activity is already recovering as the number of new coronavirus cases fall. China’s stock markets seem to expect a recovery as their stock markets haven’t fallen as much as other global stock markets.
One area in China to keep an eye on in the next few months is support for private manufacturers. This was the weakest part of the Chinese economy heading into the coronavirus situation, and is what we will be watching if and when the coronavirus episode ends. Interest rates for private companies in China still had not come down much from the 2018 credit crackdown. If private companies in China can’t finance their way out of the coronavirus situation, this will become a bigger issue. Not surprisingly, the government has just approved a special package, in the form of lower social security payments, to help small and medium enterprises stay afloat, and we will closely monitor the effect.
We have little idea of how the scenario will play out in the U.S. and Europe. We don’t know yet when health care systems and public action will cause a peak in the coronavirus impact. And, we don’t know how growth in the U.S. and Europe will be affected.
And markets really don’t like this level of uncertainty, which is why we’ve seen the recent sell-offs.
I suggest that investors try to have a view on when they think the virus’s impact will peak and then have a view on the depth and length of the recession. I think the virus will peak between mid-April and mid-May. I’d also guess that we will know about economic activity around the same timeframe because companies and the government will be reporting economic statistics, some of which will not be good.
So there will be a month of uncertainty, and then the final factor: when will the markets have fully anticipated everything? Again, I’d consider positioning over the next month. Interestingly, we just looked at discounts on fixed income ETFs, which appear during times of stress. Those discounts often take about three weeks to go away.
In this context, here are several actionable ideas:
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