PDF
Preview
Three Things We're Thinking About Today
- The Covid-19 coronavirus outbreak was declared a pandemic by the World Health Organization on March 11. Global cases exceeded 1.2 million in early April, with the United States, Italy, Spain, Germany and France among the countries with the largest number of cases. Efforts to curb the spread of COVID-19 led to severe mobility restrictions in many countries and in some cases a complete lockdown, heightening fears of a global recession as economies came to a standstill. Liquidity in global financial markets dried up, with many equity markets entering bear-market territory. Unprecedented fiscal and monetary stimulus globally, however, helped stabilize markets in late-March. While this is a difficult time, we are actively engaged with companies to better understand both the short-and long-term impact of COVID-19 and the subsequent behavioral changes on companies. This knowledge will help us to position our portfolios accordingly.
- In a case of first in, first-out, the spread of COVID-19 appears to be contained in China. Although there have been concerns of a second wave via imported cases from outside of China, the measures in place have thus far been able to limit local transmission. This has allowed the government to shift its focus from containment toward economic normalization, with restrictions gradually being relaxed and production capacity getting back online (about 80-90% at the time of this writing). While Chinese economic data reported over the first quarter were some of the worst in decades, we expect to see the start of a recovery in the second quarter as the situation in the country continues to normalize and impact from the authorities’ monetary policies filters through the economy. As a net oil importer, low oil prices will also benefit the economy, acting as a direct stimulus to consumers, most businesses and the central government. We expect a sharp rebound in domestic activity over the second half of 2020, driven by pent-up demand and government stimulus, with risks to this outlook primarily driven by halting activity in developed markets. Overall, China’s market has been relatively resilient, reflecting both some look-through as well as government support.
- The collapse in OPEC+1negotiations in early March and Saudi Arabia’s subsequent, aggressive undercutting of its official selling prices sparked an oil price war, compounding the impact of slowing demand amid a dip in global economic growth due to the global spread of COVID-19. As a result, oil prices plunged in March. The negative near-term impact on energy companies, as well as the secondary effect on economic growth in oil-exporting countries, could be considerable. Nonetheless, the oil price crash earlier in the last decade resulted in a sustained period of company (and fiscal) deleveraging, paired with improved cost control as well as encouraging, greater caution toward the sector—at least for us. Taking a longer-term view, we think selective low-cost producers with strong balance sheets remain attractive.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments; investments in emerging markets involve heightened risks related to the same factors. To the extent a strategy focuses on particular countries, regions, industries, sectors or types of investment from time to time, it may be subject to greater risks of adverse developments in such areas of focus than a strategy that invests in a wider variety of countries, regions, industries, sectors or investments.
ENDNOTES
1. OPEC+ is an alliance of oil producers, including members and non-members of the Organization of the Petroleum Exporting Countries.
IMPORTANT LEGAL INFORMATION
This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice.
The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as at publication date and may change without notice. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market.
Data from third party sources may have been used in the preparation of this material and Franklin Templeton Investments (“FTI”) has not independently verified, validated or audited such data. FTI accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments opinions and analyses in the material is at the sole discretion of the user.
Products, services and information may not be available in all jurisdictions and are offered outside the U.S. by other FTI affiliates and/or their distributors as local laws and regulation permits. Please consult your own professional adviser or Franklin Templeton institutional contact for further information on availability of products and services in your jurisdiction.
Issued in the U.S. by Franklin Templeton Distributors, Inc., One Franklin Parkway, San Mateo, California 94403-1906, (800) DIAL BEN/342-5236, franklintempleton.com - Franklin Templeton Distributors, Inc. is the principal distributor of Franklin Templeton Investments’ U.S. registered products, which are not FDIC insured; may lose value; and are not bank guaranteed and are available only in jurisdictions where an offer or solicitation of such products is permitted under applicable laws and regulation.
