News from the financial markets

Coronavirus captures global stock exchanges

Reading time: 4 Min
The increasing spread of the coronavirus outside of China has led to a sharp correction of financial markets. However, uncertainty is also fuelled by the fact that the critical incubation period is likely to be longer than previously assumed. In the past primarily the Chinese stock exchange has been suffering, however, the recent expansion into Italy and Korea has put pressure on the remaining markets.

Why is the stock market reacting so strongly today?

For a long time, markets assumed that the consequences were limited in time and location. Despite mid-term setbacks, prices have risen since the beginning of the year with important indices even reaching new record levels, while volatility has fallen to historical low levels. This made markets vulnerable to a reversal of opinion.First, the recent decline in China's new infection numbers confirmed the markets’ view. Nevertheless, the rapid increase in new infections outside China is leaves market participants dubious. After the strong previous months, the strong market reaction is likely to also be driven by profit taking. Despite the heavy levies, we do not consider the current market reaction to be panic. Those stock exchanges that hardly suffered yet, show the strongest reaction. China's local stock market, by contrast, was only slightly down today.

Unclear consequences

With the spread of the virus outside of China and the respective containment measures, the question on economic consequences arises. The main results will be supply chain disruptions around the globe. The increased international division of labor and the dismantling of temporary storage facilities have made the economy more vulnerable to disruption. This also makes comparability with similar pandemics in the past difficult. Among the most exposed industries to China are automobile manufacturing, the mechanical, chemical, and electrical industries. Few companies have adjusted their profit forecasts, but others will have to follow. Meanwhile, the European Purchasing Managers' Index published last Friday and today turned out unexpectedly well. Although these data should not be overinterpreted, it is positive that the slight recovery trend observed in previous months has continued. While for the consumer sector in particular, longer-term losses are expected, deferred expenditure on capital goods is likely to be a temporary phenomenon. This has already been seen in other similar epidemics such as SARS. Certain economic support is now coming from the sharp drop in oil prices and the further fall in interest rates. The biggest unknown is probably how policymakers will respond to any further spread of the virus.

China's First Tensions to Relaxation

Most of the delivery problems are due to factory closures in China. To stem the spread of the virus, the Chinese authorities have hermetically sealed certain regions. The health alert level has now been reduced in six provinces. Meanwhile 70% of large production sites and 30% of small and medium-sized enterprises have resumed production. More are expected to follow. Chinese public life however, has been far from normal. Particular attention by local authorities should be paid to financially support small and medium-sized enterprises in order to avoid a wave of bankruptcy.

How should investors behave?

It is not yet clear what global impact the coronavirus will have on the economic activity. It is primarily the consequences of the mitigation measures that have a bearing effect on the economy and which are confronted with the real economic recovery trends of recent months. The focus lies on temporary disruptions of global supply chains. Central banks are also credited with a continued major influence on market events. If necessary, other central banks will follow the stimulus measures taken by the Chinese central bank.

Investors are well advised to rely on broad diversification within and between asset classes. The stock market's losses are matched by gains on gold and bonds. For equities and bonds, we maintain our focus on quality values.

Content responsibility
Bernd Hartmann, Head CIO Office

This document was produced by VP Bank AG (hereinafter: the Bank) and distributed by the companies of VP Bank Group. This document does not constitute an offer or an invitation to buy or sell financial instruments. The recommendations, assessments and statements it contains represent the personal opinions of the VP Bank AG analyst concerned as at the publication date stated in the document and may be changed at any time without advance notice. This document is based on information derived from sources that are believed to be reliable. Although the utmost care has been taken in producing this document and the assessments it contains, no warranty or guarantee can be given that its contents are entirely accurate and complete. In particular, the information in this document may not include all relevant information regarding the financial instruments referred to herein or their issuers.

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