As the novel coronavirus, named COVID-19, spreads across the globe, reaction from the capital markets
has been dramatic. For the week ending Feb. 28, Wall Street had its worst week since 2008, with the major
stock indexes dipping into correction territory as anxiety over the threat the outbreak poses to the global
economy shook the markets. Investors sought refuge in safe havens like U.S. Treasuries, pushing bond yields
to record lows. While the human toll of the coronavirus is tragic, we believe the economic impact will be
sharply negative, but temporary.
Two characteristics of the virus that
are worrisome are its person-to-person
transmissibility and its mortality rate.
While the COVID-19 data is incomplete,
it appears the virus is nearly twice as
contagious as seasonal influenza and has
an estimated mortality rate of one in 100
patients. By comparison, the mortality rate for people who
contract an influenza virus is approximately one in 1,000.
The rapid and widespread outbreak has thus had a
negative impact on global capital markets. While the
situation remains fluid, we believe global economic
growth, and especially China’s performance will be very
weak in the first quarter of 2020, but the slowdown could
be temporary. China’s unprecedented action to contain
the spread of the virus should result in a sharp slowdown
in its economy. The move to essentially close all business
across much of the country for two weeks was extremely
harmful to economic growth, but could ultimately result
in a quicker containment of the outbreak.
Recently, the situation in China seems to be improving. While
workers have begun to return to work in most provinces, the
recovery has been slow as government officials and businesses
work to balance containing the virus with preventing further
weakness in economic growth. We think the Chinese
economy will likely continue to improve from here, albeit
from very weak levels.
With the number of coronavirus cases outside of China rising
rapidly, the economic disruption is spreading. While mortality
rates are lower outside of China, we are concerned about fear
impacting confidence in the U.S. and Europe, which could
result in consumers avoiding public areas. This is in addition
to the impact on travel decisions by corporations. If COVID-19
is seasonal like other coronaviruses, any slowdown could be
In response to the economic weakness, global policymakers
are reacting with further stimulus. China has increased the
amount of bank lending at lower interest rates and reduced
fees for businesses and consumers. The government has
encouraged more infrastructure spending. Local governments have recently eased up on property restrictions.
Among emerging markets countries, a number of central banks
have reduced interest rates and some governments are
beginning to introduce fiscal stimulus. Similar discussions
around monetary and fiscal stimulus are occurring in developed
markets, though no action has been taken to date. Markets are
pricing in a high likelihood of interest rate cuts from the major
developed central banks. The recent performance of capital
markets could force them into action.
Based on the underlying fundamentals we have discussed in
the past, the global economy should have been in recovery
mode. Recent surveys, concluded before the COVID-19
outbreak, showed economic activity was beginning to regain
ground. We believe those fundamentals – stimulus, the
postponement of the trade war between the U.S. and China
and a better inventory situation – are still in place. In fact, these
fundamentals could be amplified by the crisis as inventories are
drawn down further as a result of supply-chain disruptions and
more monetary and fiscal stimulus is added to the system.
The economic and market impact of the coronavirus has led
us to reevaluate our 2020 global outlook. We now believe
the global growth rate for 2020 will be around 3%, down from
our initial forecast of 3.4% coming into the year. However, we
think growth in the second half of 2020 will be closer to our
original forecast and could surprise to the upside because of
these reasons. Of course, the situation continues to be murky
and short-term risks are clearly to the downside.
Where could we be wrong? If the virus does not follow the
typical seasonal pattern and continues to spread, then our
expectation of a strong recovery will turn to concerns about
a global recession. Also, if supply-chain disruptions are
long-lasting and factories cannot get essential components
needed for production for an extended period, we could
see closures and layoffs, which will result in a downgrade
to economic forecasts. However, we are hopeful that any
economic impacts will be short-lived.
From a longer-term perspective, we believe the coronavirus
outbreak could further motivate companies to diversify their
supply chains. Last year, companies were confronted with
supply-chain issues related to the trade war and higher
tariffs. Now, factories across China have shut down because
of the virus. We believe this could accelerate a move away
from China as a sole supplier, serving as an impetus for
companies to look for multiple sources to prevent disruptions
like this from occurring in the future.
Past performance is not a guarantee of future results. Risk factors: Investment return and principal value will fluctuate, and it is possible to lose money by investing. International investing involves additional risks,
including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. Fixed income
securities are subject to interest rate risk and, as such, the net asset value of a fixed income security may fall as interest rates rise.
The opinions expressed are those of Ivy Investment Management Company and are not meant to predict or project the future performance of any investment product. The opinions are current as of March 2020, are subject
to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not intended as a recommendation to
purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon.