Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.
As the Covid-19 outbreak that began in China spreads deeper into more countries globally, the primary message from markets couldn’t be clearer: volatility is back, and risk assets are falling out of favour. But look more closely and there are some signs of counterintuitive strength, too.
US stocks fell more than 6% amid a two-day selloff this week and the 10-year Treasury yield touched a record low, as investors pare risk exposure and seek safe-haven assets. Gyrations have returned to stock markets after a long period of relative calm, with the Chicago Board Options Exchange (CBOE) Volatility Index surging to a 14-month high.
In our view, the volatility isn’t as surprising as the fact that it took so long to rear its head. However, the recent swings indicate the complacency that appears to have settled over markets during the earlier stages of the outbreak has been dislodged.
The general response in recent sessions has been mostly predictable. Commodity prices took a hard hit amid concerns that the epidemic will curb global demand. Crude oil led declines with a weekly loss of about six per cent, while copper and rubber were both down as of Wednesday. A rush to safe-haven assets, on the other hand, pushed gold prices to a seven-year high this week, and the Japanese yen has rallied too.
Pockets of resilience
But there have been some perhaps unexpected pockets of resilience. Stock markets in mainland China, where the virus began, held up relatively well this week amid the global selloff. Investors appear to be hoping the worst is over for China, as the daily tally of new Covid-19 cases outside of the locked-down province of Hubei dropped to nine on Monday and five on Tuesday - down from hundreds per day in early February.
Markets have rebounded, with onshore funds seeing robust inflows in the weeks since trading resumed following the Lunar New Year holiday - sectors including e-commerce and tech startups have been outperformers. Alongside onshore equities, both the Chinese currency and the Asian high-yield bond market also look to be performing better than expected.
What’s going on here? In addition to the slowing number of new confirmed cases in the mainland, investors may also be anticipating additional monetary and fiscal policy support from the Chinese authorities. But there’s another factor at play - namely, the valuation cushion that already existed in these assets before the Covid-19 outbreak.
During times of short-term market panic, it can help for investors to re-focus on fundamental factors with some longevity, as these are what will prove to be more important to long-term returns. Along these lines, a bias against sectors and companies with over-extended balance sheets and towards those with higher cashflow visibility can also help mitigate market volatility.
Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.
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