13 February 2020
Rhys Petheram, Fund Manager, Fixed Income
Coronavirus: don’t take a rapid economic pickup for granted
Have we already passed ‘peak fear’ when it comes to coronavirus? That is a question on the minds of many of Jupiter’s fund managers this week, as the market’s reaction to the spread of the virus began to imply that investors were willing to look through the current headlines.
Yet people shouldn’t automatically assume there will be a V-shaped economic recovery, cautioned Rhys Petheram, Fund Manager, Fixed Income.
Indicators of business activity in China are far from normalising, with statistics from Nomura showing that coal consumption at power plants and traffic congestion in major cities have flat-lined from the seasonal low around the lunar new year period. The longer the disruption goes on, the bigger the risks will build, including potential impacts such as a rise in non-performing loans for Chinese banks.
Daily coal consumption of six major power plants
Traffic congestion in 100 Chinese cities
Sources: WIND and Nomura Global Economics, February 2020
Picking up that theme, Charles Sunnucks, Fund Manager, Emerging Markets, noted that visitors to Macau over the lunar new year period were 80% down year-on-year, while a well-known electronics contract manufacturer (and China’s largest private sector employer) has said that a return to full production at its factories could still take weeks.
At present, however, markets seem willing to look for silver linings: Charles commented that the big Chinese internet giants have held up relatively well on the assumption that Chinese citizens staying at home will spend more time online.
Looking beyond China, Rhys highlighted that valuations in parts of the credit markets are quite alarming, with spreads back to all-time tights . Much of the US high yield bond market is hardly providing investors with any compensation for default risk, let alone for other factors such as liquidity or risk preference. Markets overall are pricing in a US high yield default rate of less than 1% compared to the actual current rate of 3% and a forecast from Moody’s that the rate could rise to 3.3%. Rhys commented that the only pocket of value he can identify at the moment is in smaller-size bonds within the high yield market, which haven’t seen the same spread compression as larger-size bonds, which Rhys speculated could be because the smaller-size ones are beyond the reach of giant ETFs.
Greg Herbert Fund Manager, European Opportunities
A very defensive rally in European markets
It is business as usual for most European markets in a low interest rate environment, said Greg Herbert, Fund Manager, European Opportunities. The coronavirus is starting to have an impact on European companies in terms of supply and demand now, but most of the major European indices are still hitting new long-term highs.
It has been a very defensive rally, though, with the value rotation seen last autumn now pretty much unwound, while the most defensive names are the ones gaining traction. Greg said that there seems to be no limit on valuations for stocks with a lot of certainty – names across the healthcare, telecom and digital payments sectors, for example, are up as much as 20% year-to-date, which is very much in-keeping with the pattern we’ve seen in recent years.
One new sector to add to this list is renewable energy generators. Greg said this is something of a surprise given that the utility sector has never been considered a ‘glamour’ sector; several of these names are up almost 20% year-to-date. It is unusual to find glamour stocks that offer attractive yields as well, which is particularly appealing for an income investor.
We are in the middle of the European results season and thus far, for 2019 in aggregate, European earnings have been flat. That’s been heavily weighted by a 25% fall in earnings for the energy sector, and a 39% fall in earnings for the materials sector; while earnings in most other sectors have been strong, including consumer staples, financials, technology, telecoms and even utilities sectors. With minimal impact on European markets from the coronavirus so far, Greg and the team are holding some cash, ready to invest if cracks start to appear. So, Greg thinks it is a good time to be patient!
Robert Siddles Fund Manager, US
The future is bright for the dynamic, lightly regulated US economy
Robert Siddles, Fund Manager, US, touched on the decade ahead for the US. As the world deglobalises, Robert expects the US to increasingly go its own way, a process which would become further entrenched by Trump’s re-election this year. However, if America becomes less relevant in a general sense to the rest of the world, Robert believes its internal economy will continue to grow: it is dynamic, lightly regulated and has a huge domestic market, which will still make it a good place to invest particularly in domestically focused companies.
Turning to the theme of “Growth versus Value”, Robert said that the bull market in Growth should be treated just like any other bull market, in that it won’t reverse until there is broad capitulation. At the moment, however, Value investors have an abundance of evidence to show why they’re right, and so are not inclined to capitulate.
Steve Davies Head of Strategy, UK Growth
UK macro data continues an upward trend
Steve Davies, Head of Strategy, UK Growth highlighted the improving macro data in the UK. Recent figures show a 4.1% rise in house prices, an 8.8% rise in the number of mortgage approvals, as well as continued improvements in both consumer confidence and the Services PMI (which both hit their highest levels since September 2018). Steve also commented that the upcoming results season in the UK will give further data points around any rebound in activity since the election.
Finally, Steve returned to the theme of the coronavirus outbreak, echoing the earlier comments from his colleagues that markets had been remarkably sanguine, even when companies make specific statements drawing attention to the uncertain impact on their earnings. This is in contrast to the last few years, when any warnings or downgrades have been treated very harshly by the market.
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