Market update: Coronavirus

Investment markets around the world received a boost from central banks as the US Federal Reserve made a surprise cut to interest rates, and the G7 finance ministers issued positive words around monetary support should the coronavirus outbreak continue to impact global growth.

On Tuesday (3 March) the US Federal Reserve cut the Federal Funds Rate by 50 basis points (bps) to 1-1.25% on the basis that the coronavirus “poses evolving risks to economic activity”. It followed earlier rhetoric to “act as appropriate”, although it stressed the fundamentals of the US economy remain strong.

On Monday the Bank of England said it continued to monitor developments and was working closely with HM Treasury, the FCA and international partners to ensure all necessary steps were being taken to protect financial and monetary stability. This followed a similar announcement from the Bank of Japan, which said it would strive to provide ample liquidity through monetary policy action.

Meanwhile, the finance ministers of the G7 released a joint statement on Tuesday (3 March) pledging their readiness to deploy fiscal measures, while Australia and Malaysia also cut interest rates as a result of the coronavirus outbreak.

The investment team at Quilter Investors point out that the response from central banks as well as fiscal support from Italy, Japan and China has helped boost markets, with US equities surging after the emergency rate cut. But there was also some less positive news as the latest Purchasing Managers Index (PMI) figures showed Chinese manufacturing had slowed significantly in the past month. This raises expectations for the country’s growth to contract in the first quarter of the year.

And with more countries reporting their first cases of the virus, and the US ramping up its testing process and implementing monetary policy actions, we cannot rule out further volatility throughout the week as the world waits to see if the outbreak globally follows the same exponential growth rate experienced in China.

However, as a team we continue to discuss the situation with our underlying managers and the potential impact this may have on company earnings, which would then provide a tangible insight into the effect on company valuations.

For the time being, the majority of managers appear to have been buying into names where they see a significant disconnect between the current risk posed by the coronavirus and the price movements in markets.

If other central banks join the US in introducing significant rate cuts, then this combined with a fiscal boost from governments could improve the fortunes of the quality growth companies that fared so well in 2019, rather than the more value-orientated holdings that had been expected to outperform in 2020.

That said, monetary stimulus is likely to last longer than the virus, so it’s all about staying in the game and remaining invested for the longer-term – rather than trying to ‘time” the markets on the basis of short-term noise.

Paul Craig, portfolio manager at Quilter Investors, says: “We have spent a lot of time analysing the potential impact of the coronavirus along with the potential response and contacting our underlying managers to see what they are doing. A few had close to 10% cash and so they have been looking for opportunities to deploy this. We continue with the general day-to-day maintenance of the portfolios while we closely monitor the situation, ready to act should events evolve.”

Helen Bradshaw, portfolio manager at Quilter Investors, adds: “Towards the end of last week we allowed a small proportion of the cashflows into the portfolio to build up, while the remainder was invested in holdings that we felt had suffered unduly in the indiscriminate sell-off that markets experienced.”

And Stuart Clark, portfolio manager at Quilter Investors, notes: “With our normal rebalance process already scheduled to occur in the next week, we are closely monitoring the situation to stay fully informed ahead of any potential changes that we might deem are necessary.”
We are continually monitoring the latest developments as a team and should the coronavirus outbreak escalate in the UK as some predict, we have well prepared plans and systems in place for business continuity to enable us to continue managing our portfolios without missing a beat.

This article is a guest publication & for information purposes only. The views expressed in this article are kindly provided by Quilter Investors.

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