Markets are all over the place right now, to put it mildly, thanks to the Covid-19 outbreak. And it is a bold forecaster who predicts where they will go next or how long the current volatility is likely to last.
Two of the world's key equity markets – China and the US – have shown wildly different trajectories since February, largely because of the status of the contagion in each country. The main similarity is that both have seen huge amounts wiped off corporate valuations.
Beijing seems to have the disease largely beaten, though cases are still being reintroduced from elsewhere. America, meanwhile, is approaching peak contagion, with grim predictions of between 100,000 to 240,000 deaths being forecast by scientists.
One could argue endlessly about the pros and cons of how each government has dealt with the threat so far, but it is clear that both are now taking it very seriously indeed.
Here, four investment experts give their views on how they view assets right now in each of the world's two biggest economies – two focusing on China and two on the US.
Daniel Poon, deputy chief investment officer
Zeal Asset Management
We believe that the global trend of low interest rates and bond yields, especially in the US, are enhancing the relative attractiveness of assets in China. These low rates favour the valuations of both Chinese equities and fixed income securities.
Following the recent rate cuts, one of the obvious appeals of the China market is the increased yield gap between US and Chinese debt. For example, the US two-year treasury bond yield dropped to 0.36% as of March 17, while the Chinese government bond rate remained stable at 2.21%. The extra yield offered will drive a stronger influx of capital, supporting the valuations of Chinese securities. In addition, higher investment inflow will spur demands for RMB, benefiting stabilisation of the currency.
On the monetary policy side, global easing provides China with higher flexibility in formulating and implementing expansionary counter-cyclical measures during this tough time. This gives China more tools to stimulate the economy against the downward pressure stemming from the virus crisis.
Manishi Raychaudhuri, Asia-Pacific head of equity research
Different Asian countries are in different phases of the Covid-19 contagion and therefore at different stages of adoption of economically debilitating measures.
The Chinese economy seems to be slowly returning to normalcy as factories open and workers gradually return to workplaces, especially outside Hubei. The sharp recovery in China’s manufacturing PMI in March is partly supported by high-frequency on-the-ground data from various sectors.
No doubt consensus earnings estimates for Chinese companies could decline further – particularly in consumer staples, consumer discretionaries and possibly in healthcar. But on the whole, if the pandemic is controlled globally in the second half of 2020, we think a 10% to 11% earnings per share compound annual growth rate for China over 2020-2021 could well be achievable.
China’s technology sector, however, still seems expensive after its sharp outperformance in 2020.
Hani Redha, portfolio manager for global multi-asset
Over the short term, we think that there is still more pain to be absorbed. Yet the virus will eventually fade, and we already believe exposures in countries like China and South Korea, which appear to be on the path to recovery, are attractive.
And while the US is still in the thick of the crisis, US equities could emerge in a strong place. The US economy came into the crisis in a very strong position and with an improving growth profile. It is inherently healthier than many others and that the transmission mechanisms of monetary and fiscal policy are also stronger. With that, the snapback potential from the US is likely to be robust, which could put investors in a position to buy US assets at attractive valuations.
The other segment that we would highlight is the credit markets. Credit markets have started to price in the current weakness and the risk of rising defaults, particularly in the energy sector as a result of the oil price collapse. We do expect to see significant defaults in the energy space in the coming months, with 30%-40% of the sector at risk.
But more broadly, if the scenario is one where we experience a few months of negative growth as a result of the virus and then a recovery, we would not expect a widespread spike in default rates outside of energy, which makes up a much smaller portion of the high-yield basket than in the past. Spreads have blown above 700 basis points as credit has repriced and this market may start to look attractive once this trend has peaked.
Lisa Welch, senior managing director and senior portfolio manager
Manulife Investment Management
We can already see the sharp declines in the prices of US financial stocks, particularly the banks, with valuations moving towards extreme levels. The experience learned during the 2008 global financial crisis shows that banks did operate relatively profitably in a zero-interest-rate environment that lasted from December 2008 to December 2015.
The latest cuts from the Federal Reserve will undoubtedly put pressure on banks’ net interest income over the medium term, but the most recent monetary stimulus should help the economy when we move past the disruptions caused by Covid-19.
Having said that, we do not expect the Fed to utilise negative rates and we anticipate more bond purchases to ensure that credit markets function correctly. These should be similar in nature to the quantitative easing rounds that came in the wake of the 2008 financial crisis.
On the other hand, banks with mortgage banking businesses will benefit from a wave of refinancing activity in the next quarter or two. We expect banks will return capital to shareholders in the form of dividends, as well as continue to demonstrate their ability to compound book value over time.
We cannot say for sure when the share prices of banks will rebound. We believe, however, that the US banking industry is fundamentally sound and that valuations are significantly depressed. In comparable periods before, when bank stocks traded at trough multiples, the market dislocation proved to be transitory and historically a very attractive entry point for long-term investors.