Global equities rebounded last week, gaining 3.1% in local currency terms and as much as 4.6% in sterling terms. They have now regained the bulk of the losses sustained due to fears over the coronavirus, although Asia and Emerging Markets at the epicentre of the outbreak have only recovered around half their declines.
Markets have taken heart from encouraging news regarding the spread of the virus. Whereas the number of confirmed cases had been growing at over 20% per day a week ago, the growth rate has dropped in recent days to single digits. While the data is clearly not the most reliable given the chaos in Wuhan, it does suggest efforts to contain the virus may be starting to work.
Last week’s economic numbers were also a source of encouragement with global business confidence improving more than expected in January, and the US figures also surprising on the upside. This improvement will no doubt be thrown into reverse by the coronavirus over the next couple of months. Indeed, Chinese growth looks set to slow sharply in the first quarter and global growth is also likely to weaken significantly.
However, the important point is that this disruption is expected to be only temporary, with activity bouncing back in the second and third quarters. This was certainly the experience of previous health scares. This time, the backdrop of improving business confidence should increase the ability of the global economy to withstand the hit from the virus.
Even so, it will be a few weeks before it becomes evident that the virus really is under control, and a few months before the global economic recovery has clearly managed to ride out the disruption. We anticipate further market volatility during this period of uncertainty and we are not looking for global equities to sustain a break higher for a while yet.
As for UK equities, they have started to underperform again and have now retraced the outperformance since October. Worries over the limitations of any UK-EU trade deal, along with the Bank of England’s recent distinctly downbeat growth forecasts, seem to have cast a pall over the UK market. We are far from long-term bulls on the UK economy. But we do believe the combination of attractive valuations and a significant pick-up in growth – albeit from meagre levels – should lead to UK equities faring relatively well over the coming year.