An Epidemic of Concerns

Financial markets started off the year on the right foot but stumbled over the Wuhan coronavirus outbreak in China. Investors were faced with a different type of risk, which does not make headlines as often as political risk does. Analysts from major financial companies believe that this epidemic is not a threat to the market, but only a short-term risk. Equity markets declined, as the news that the number of infections increased hit the wire. Moreover, as cases that the virus is spreading outside China increased, investors feared for the worse. As a result good quality assets, such as high quality sovereign debt and precious metals, such as gold gained. Despite the spike in market volatility, economic analysts are confident that this is a short-term negative patch and that market sentiment should bounce back.

The European stock market closed on a negative note as both the UK and Italy reported their first cases of coronavirus. The World Health Organisation declared a global emergency as more than 200 deaths were reported and nearly 10,000 contracted the virus by end of January. However, the indices dropped in the following days as fears continued to persist.

The pan-European STOXX 600 dropped by more than 1% throughout the month. Fears over the impact of the epidemic, had its toll on European equities. Sectors which are usually the most volatile, such as consumer discretionary companies declined. In addition, those with significant revenue generated from China, underperformed. On the other hand, utility companies topped the list of gainers.

On the data side, annual inflation in the Eurozone improved slightly in January, yet still below the European Central Bank’s target. In addition, the latest unemployment figures show that employment is on the rise in the Eurozone, and those out of employment now amount to 7.4%. This is the lowest level in the past 11 years.

During the month, the FTSE 100 shed just over 3% as it closed at 7,286.01 points. The Bank of England (BoE), kept interest rates unchanged. The decision surprised market participants who were expecting a rate cut. In addition the Pound was very volatile, as initially it lost value on Brexit concerns while it gained ground as the BoE kept interest rates unchanged at 0.75%. At the end of January, the UK officially left the EU and entered in an 11-month transitional period.

On the other side of the globe, the US started off the year in the green, powered by a positive close to 2019. However, by the end of January tables were turned and the market closed off in the red as fears over the spread of coronavirus sent investors seeking for safety. The S&P 500 Index closed flat during January, and the Dow Jones Industrial Average fell by 1%, erasing its year-to-date gains on the last trading day of the month. Fears over the spread of coronavirus, led the Trump administration to impose a temporary travel ban upon non-US citizens travelling from China. This lead to investors’ concerns over lower global consumption and growth.

As is usually the case, when investors expect consumption and growth to decline, the price of oil follows suit. As a result energy companies were among the worst performers.

Meanwhile, during the first month of the year, the Asian Stock market reached a seven-week low. At the end of the month, Japan’s Nikkei 225 registered a 2% decline despite upbeat corporate earnings. Chinese manufacturing data expectations were met, however, the Purchasing Managers’ Index needs to reflect the virus’ impact since the data was collected before the outbreak.

In terms of global bonds, good quality sovereign debt gained and yields declined, as investors jumped on low risk assets. In the US, the yield on the two-year bond declined to 1.31% while yield on the 10-year bond closed at 1.51%, down from 1.92% a month earlier. In Europe, the 10-year German Bund closed further in negative territory, as it closed January with a negative yield of 0.43%. Corporate bonds were positive but lagged sovereign bonds.

As stocks entered February, worries about the coronavirus remained a concern. However, if history taught us anything about market’s reaction to previous epidemics, it is that markets tend to bounce back relatively quickly after an outbreak of a new epidemic. In fact, last week markets bounced back as virus treatments were being tested. This news, together with a number of positive economic data out of Europe and the US, boosted gains in global equity markets.

Lianne Zahra is a Trader at Jesmond Mizzi Financial Advisors Limited. This article does not intend to give investment advice and the contents therein should not be construed as such. The Company is licensed to conduct investment services by the MFSA and is a Member of the Malta Stock Exchange and a member of the Atlas Group. The directors or related parties, including the company, and their clients are likely to have an interest in securities mentioned in this article. Investors should remember that past performance is no guide to future performance and that the value of investments may go down as well as up. For further information contact Jesmond Mizzi Financial Advisors Limited of 67, Level 3, South Street, Valletta, on Tel: 2122 4410, or email [email protected]