Macro

Up until last month, our global outlook was one of moderate growth in 2020. Thanks to dovish monetary policy globally, this long economic cycle looked set to continue for another year. This remains possible depending on how quickly the coronavirus is contained. At present, we think the coronavirus outbreak will dent Chinese Q1 GDP growth and prompt further government stimulus. It is still too early to speculate whether it will trigger a global recession.

The shock to Q1 global growth has the potential to be significant, given disruption to activity in China itself, combined with the impact on global supply chains, trade and tourism, as well as overall uncertainty. Even in a ‘contained’ scenario of the virus outbreak, global growth could fall at least half a percentage point in Q1, with some recovery thereafter. The overall impact is likely to be protracted and may well extend further into the year. Around half of the estimated impact will come from a direct hit to China’s growth and the other half from a shock to its trading partners as well as to global tourism.

The way that global equity markets have performed during past epidemics may help gauge how they might respond to the current situation. There are two key takeaways for investors. Firstly, selling pressure tends to last for about 1-3 months. Secondly, markets tend to trough with the momentum of news flow relating to new infections. The news that coronavirus cases have spiked in Hubei province, which contains Wuhan, suggests that markets will remain volatile in the short term.

The next month will be a critical test in terms of assessing the economic damage wrought by the virus, with potentially important implications for our global outlook. The physical measures taken to combat the spread of coronavirus are more stringent than SARS and may bite harder into economic activity. As the costs of government support mount up, they may set back Chinese attempts to de-leverage. For now, the assumption among many of the companies we invest in is that the impact of the virus will be relatively short-lived and (like SARS) disappear as the summer arrives, triggering a snap-back in economic data, aided by Chinese government assistance to markets and the real economy.

Given how quickly the situation is moving, we are seeking to avoid trading on news flow and are instead focusing on longer-term themes and corporate fundamentals. Longer-term, China’s structural consumption growth story remains firmly in place. We continue to favour sectors and strategies aligned to innovation in China, and to see companies in this space as market share gainers despite any near-term disruptions.

These include sectors like online education service providers, online grocery, e-commerce and express delivery, and innovative healthcare solution providers. At the same time, these sectors should be well placed to benefit from pent-up demand in any recovery scenario once the outbreak is brought under control, especially if the government introduces measures to combat the possible dent in Chinese GDP growth.

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