WEEKLY POINT-Coronavirus fails to dampen equity markets, Company News

by Patrick Vignal

PARIS, February 14 (Reuters) – The equity markets are still not panicking in the face of the coronavirus epidemic despite a risk for global growth which is becoming clearer, which raises questions about a possible complacency of from investors.

The stock markets have briefly declined at times, especially when the health authorities of the Chinese province of Hubei, home of the epidemic, announced Thursday a clear increase in the number of deaths and people infected after changing their diagnostic methods.

The figures provided the next day by Beijing marked a further slowdown but remain considerable with 121 additional deaths and 5,090 new cases of contamination.

With nearly 1,400 deaths and 64,000 cases of contamination, the current toll of the Covid-19 coronavirus far exceeds that of the 2002-2003 SARS.

The Chinese government, however, did not skimp on the means to try to stop it with the extension of the holidays of the lunar new year, the closing of factories and quarantine measures of an unprecedented scale.

The epidemic, however, continues to spread and there is no longer any doubt that it will have consequences for the financial markets and the economy in general.

A DIFFICULT IMPACT TO QUANTIFY

"The coronavirus is causing significant disruption for businesses, consumption and global supply chains," said Charlie Awdry, Chinese equity portfolio manager for Janus Henderson Investors.

"We expect a significant impact on the economy but extremely difficult to quantify," he added before predicting further easing measures on the part of the Chinese authorities in order to slow down the slowdown in the second largest economy in the world. .

Although volatility has returned to the markets, with brief episodes of risk aversion, stocks nonetheless continue to prosper, as illustrated by the close to 4% gains since the start of the year for the European Stoxx 600 as for the American Standard & Poor's 500, which have set records in recent days.

It is certain, however, that the virus will have an impact on China and its main partners, as well as those assets that are highly exposed to the Chinese market.

"Therefore, on what rests the optimism that seems to show investors in stocks?" Wonders Nadège Dufossé, responsible for asset allocation at Candriam.

"To simplify, we can say that the equity markets take into account the idea that this negative impact, even a strong one, is only temporary and will be largely caught up in the second part of the year," she replies.

According to Barclays European equity strategists, the recent fall in stocks exposed to China as well as bond yields seems to indicate that the markets are not overly complacent at this stage.

The return of volatility also creates opportunities for investors, they argue before acknowledging that the virus increases downside risks to activity and profits.

OIL AND METALS SUFFER, RATES ALSO

Europe is not immune, being largely exposed to my Chinese demand, to its tourists and to supply chains of which China forms an essential link, we still read in the note from Barclays.

Especially since the end of 2019 was not bright for the economy of the euro area, as shown on Friday the announcement of a stagnation of the German economy in the fourth quarter.

The results of companies, they are variously appreciated and investors neither hesitate to sanction disappointments, like Capgemini, which lost 3.4% Thursday after growth below expectations, nor to applaud the good surprises, like that of Kering (+ 6.3% Wednesday after sales above consensus).

The coming days will still bring their share of results and indicators, including several confidence indices and, on Friday, the preliminary results of PMI surveys on activity in the private sector of the euro zone in February.

Meanwhile, if the actions seem to minimize the threat of coronavirus, it is not the same for all asset classes, said Nadège Dufossé, who recalls that China represents almost 30% of world manufacturing production, more than 20% of energy consumption and just over 10% of consumption.

"Oil prices have dropped 25% since early January, industrial metal prices are also down 10% and US rates returned to levels close to last summer, when investors feared a recession in 2020 ", she notes.

The bet of an impact limited by its magnitude and duration of the coronavirus that the equity markets seem to make could pay off provided that the peak of the epidemic is reached in the coming weeks, estimates the strategist of Candriam , which favors a slightly more cautious attitude in terms of investment.

"We will only know afterwards whether the equity markets were optimistic or accommodating," concludes Nadège Dufossé.

(edited by Marc Angrand)