Equity Strategy: The storm will pass and opportunities will rise
About the author:
- Author name:
- By Andrew Tang
- Job title:
- Analyst - Equity Strategy
- Date posted:
- 27 February 2020, 2:30 PM
- Sectors Covered:
- Equity Strategy and Quant
Up until Friday, markets were relatively immune to the ongoing novel coronavirus outbreak. However, the rapid spread of cases outside of China has led to a re-evaluation of the risks.
The situation has also prompted the World Health Organisation to declare the outbreak a Public Health Emergency of International Concern, only the sixth time this measure has been invoked. Although common influenza kills more than half a million people per year, the novel coronavirus is more deadly, and the rapid rate of infection has forced the shutdown of factories and other places of work, disrupted supply chains and led to extensive bans on global travel.
The current episode bears striking similarities to the SARS outbreak in early-2003, with both outbreaks suspected to have originated from live animal markets in China. Although the fatality rate of the new virus is lower than SARS (~2% vs 9.4%), the spread of confirmed cases has been far more explosive which could have medium-term ramifications on the outlook for global growth.
This comes at a time when the global economic slowdown appears to have reached an inflection point.
We are not epidemiologists, but many experts have weighed in on the varying peaks of the contagion.
We boil it down to two key scenarios:
- Optimistic scenario: new number of patients peak early March and fades away gradually. The total number of cumulative patients will then plateau and decline with the onset of warmer weather.
- Pessimistic scenario: new patients briefly decline followed by a subsequent wave of accelerating new patients. This would imply that the epidemic could drag out past H1 2020.
While it is still very difficult to forecast at this stage, we lean towards the optimistic scenario where awareness and containment efforts so far have been effective in limiting the spread of the virus. New case numbers looked to have stabalised around 1000 new cases a day.We note the sharp rise in the number of cases outside of China over the past few days is a concern but this is running off a very low base.
Moreover, the WHO recently commented that the incoming data does not yet fit the definition of 'pandemic' which would imply they are still of the view that virus can be contained.
What does this mean for the equity market?
After a strong liquidity-induced run since the start of 2019 (ASX 200 Acc: +32% to 21-Feb-20) a market pullback was long overdue.
It is difficult to predict the magnitude and the duration of this pullback however several indicators we think will offer useful clues for investors include:
- 'Pandemic'-related story count in the news;
- stabilising and slowing new case count;
- supportive fiscal and monetary policy announcements.
Ultimately we think markets will likely consolidate around these levels for a while with its future direction determined by how quickly the virus can be contained.
Michael Knox has an index target of 6600, which suggests around 4% downside to current levels.
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