Before the outbreak, the market consensus was for a somewhat stronger global growth in 2020 thanks to receding tail risks that impacted markets for much of 2019 such as the US-China trade war, Brexit uncertainty and the delayed passage of the USMCA. A phase one trade deal between China and the US, the Conservative Party's clear majority in December's general election in the United Kingdom -- which paved the way for the approval of the withdrawal agreement from the EU -- and the passage of the NAFTA re-write through the US House of Representatives combined with significant additional monetary policy accommodation from global central banks helped underpin an upturn in sentiment in late-2019 and expectations for improved economic growth. The rapid spread of the coronavirus has called that rebound into question.
Economists have only a few instances in recent decades upon which to project the economic and market impact of the epidemic such as the SARS outbreak in 2003 and the MERS outbreak of 2012. However, it is worth noting that China's contribution to global growth today is several times larger what it was in 2003. Global supply chains have become much more integrated over the last 17 years, as well, amplifying the potential economic impact of the outbreak.
While China has taken dramatic steps to limit the spread of the virus, reports of illness continue to grow, both within China and outside it. The immediate market impacts have manifested themselves in a rise in market volatility, a broad decline in global interest rates as investors seek the safety of bonds and a fall in industrial commodities prices, particular oil, on expectations for lower demand due to factors such as quarantines, production shutdowns, and travel restrictions.
Assessing the market with a long-term lens
From a portfolio perspective, it is difficult to determine precise exposure to the outbreak with any degree of certainty in the short term. Sources of direct risk will include individual companies such as those with exposure to Chinese consumption, significant supply chains running through China, and exposure to energy prices. Indirect exposure will include stocks whose businesses are indirectly affected by what is expected to be a slowdown to global growth. Macro dislocations from pandemics, political turmoil, natural disasters, civil unrest, etc. are always hard to predict and MFS does not try to generate alpha based on predicting the outcome but rather focusing on opportunities from individual companies based on their long term outlook.
Rising volatility creates opportunities
MFS is watching the virus's progression closely, though there is a great deal of uncertainty as to how it will unfold. The market impact of the 2003 SARS outbreak was largely limited to one or two quarters, though it is too early to draw such a conclusion today. MFS continues to monitor potential impacts on a company by company basis, relying on MFS’ global research platform, which incorporates macro, market and tail risk events into the analysis while being mindful that rising volatility and market drawdowns can create opportunities for patient, long-term investors.
MFS or MFS Investment Management refers to MFS Investment Management Canada Limited and MFS Institutional Advisors, Inc. This article was first published in the United States by MFS. on Feb. 24, 2020 and is distributed in Canada by Sun Life Global Investments (Canada) Inc., with permission. This document is provided for information purposes only and is not intended to provide specific financial, tax, insurance, investment, legal or accounting advice and should not be relied upon in that regard and does not constitute a specific offer to buy and/or sell securities.
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©Sun Life Global Investments (Canada) Inc., 2020. Sun Life Global Investments (Canada) Inc., MFS Investment Management Canada Limited and MFS Institutional Advisors Inc are members of the Sun Life group of companies.