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Market Commentary February 2020


Guy Foster, our head of research gives you a rundown of the financial markets for the first few weeks of 2020.

  • The best laid expectations of forecasters were rapidly tested during the first days of a dawning new decade with a series of unforeseen and largely unforeseeable events.
  • Within the very first days of the new decade the assassination of the Iranian general, Qassem Soleimani, raised fears that prolonged conflict in the middle east might result.
  • The risk of conflict around the Persian gulf is a persistent threat to the global economy as it has the potential to disrupt oil supply, pushing energy prices up and raising costs for companies globally.
  • Iran’s leaders, probably judging that all-out, military conflict would be terminal for their regime, seemed to respond in a way which has saved face whilst allowing the situation to de-escalate, at least initially.
  • Shortly afterwards a greater and less predictable threat emerged in the form of the novel coronavirus emanating from the Chinese city of Wuhan.
  • It has been noted that the virus seems more contagious than previous, similar infectious illnesses that have threatened the global economy over the last two decades (SARS, swine flu, MERS, Zika, Ebola), but initially seems to have a lower mortality rate.
  • The illness also strikes China at a time when the country’s rapid growth has made it the largest single contributor to the global economy, raising fears of severe economic disruption.
  • The market’s reaction of benign almost indifference has differed markedly from that of the, at times sensationalist media narrative.
  • Clearly the extraordinary attempts to stop the spread of the disease within China will have a dramatic impact on the economy in the first quarter of 2020. Around two thirds of the country took a protracted fortnight extension to the lunar new year holiday which, back-of-the-envelope maths would suggest, implies a decline of 2.5% to 2020 GDP. However, it is widely anticipated that much of this will be economic activity deferred rather than lost, with the lasting impact restricted to sectors like travel and tourism.
  • Meanwhile attention turns to the spread of the disease which infected tens of thousands of people across 28 countries.
  • Plenty of attention has been given to the search for a vaccine. However history, has shown that the eventual decline in the infection rate of diseases of this type actually comes from controlling cases and symptoms. coinciding with an improvement in environmental conditions.
  • So with 75% of cases restricted to Hubei (a province which represents about 0.5% of the world’s population) and 99% of them within mainland China the disease remains remarkably contained. The emergence of Hubei from its winter should see the infection rate slow further.
  • Markets suffered some weakness during the weeks in which the infection rate rose most sharply. If there was any contrast to be drawn between this and previous episodes of infectious diseases, then it was that the market took an even more magnanimous view of the lasting impact of the outbreak on economic growth and corporate profitability than it has done in the past.

“So, who had ‘mutated bat-snake flu’ as their top market risk for 2020?”

Tracy Alloway (Bloomberg reporter) @tracyalloway

Our Markets in a Minute video with Guy Foster gives you further insight to some of these key issues and what investment decisions we have made because of them.

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