Carmignac Marktkommentar - Coronavirus

Marktkommentar

In our opinion, the coronavirus crisis, which had the markets reeling for a few days, should be understood as a “Black Swan”. The use of this metaphor is not to underline the severity of the crisis, but to keep in mind its unique nature which makes parallels with past cases and “normal” statistics useless to risk analysis.

27.02.2020 | 14:50 Uhr

Didier Saint-Georges

Didier Saint-Georges, Member of the Strategic Investment Committee at Carmignac

The crisis needs to be analyzed based on the reliable data available, not on speculations about its future developments, which no one can forecast today with any accuracy. In that sense, it is of the same nature of past exogeneous shocks, such as the terrorist attacks in the US in 2001, the SARS virus in 2003 or the Fukushima accident in 2011. In all such cases, the damage to markets and the economy tends to be largely created not by the initial cause of the crisis but rather by the reactions to it, be it the measures of containment which hurt both consumer demand and, in a later stage, supply chains, or by psychological stress that hurts confidence, consumer demand and risk assets.

A viral propagation presents a unique feature in that it tends to follow as such an exponential pell-shaped trajectory, meaning that it starts with an exponential acceleration of new cases, which then decelerates, plateaus, before going down and ultimately disappearing. In the present case, the trajectory of new infections is already in its descending phase within China but is, logically because of the time lag of propagation outside of the country, only starting now its acceleration phase outside of China. This explains why international markets first took the mostly Chinese crisis in their stride, with the support of still very accommodative monetary policies, and why now the internationalization phase of the propagation is sending waves of stress across global risk markets. These waves will last until their trajectory moves on to the deceleration phase.

Economically, the immediate impact on global demand is likely to increase as the hit to consumer confidence widens to developed economies. Conversely, as China employees in manufacturing sector progressively go back to work, as they already do, the damage to supply chains will be getting a relief.

Trying to time short term market gyrations is in our opinion a very unreliable way to manage portfolios at this juncture. It seems more appropriate to us to focus on two priorities:

1) reduce overall risk exposure across asset classes to moderate levels. This will not totally prevent volatility from affecting daily NAVs of funds but will provide the most acceptable profile to all potential scenarios, and 2) Ensure that equity assets held in the portfolios are very high medium-term conviction names, which we would be prepared to add to should strong opportunities arise. Given our view that policy makers, including in China, are unlikely to resort to massive reflation policies this year, these high conviction names remain growth stocks across the world, including emerging markets, with very strong visibility across economic cycles.

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