Market Analysis Feb 2020

At the start of the month, US equities demonstrated robust performance, propelling the S&P 500 Index to a historic high on the back of strong economic indicators and President Trump's acquittal in the impeachment proceedings. Nevertheless, as the count of coronavirus cases escalated, including within the United States, the financial market experienced an extremely sharp sell-off, marking one of the most severe in history.

Employment data from January portrayed a favorable picture, revealing the creation of 225,000 jobs beyond the agricultural sector. Additionally, there was a modest 0.1% annual wage increase, with wages reaching 3.1%. Although unemployment saw a slight uptick from 3.5% to 3.6%, the rate remained close to a five-decade low, as the labor participation rate rose from 63.2% to 63.4%.

Despite this positive data, concerns pertaining to disruptions in supply chains and potential economic slowdown triggered a widespread sell-off toward the end of the month. Energy and financial sectors bore the brunt of the impact, even as traditionally defensive sectors such as utilities faced challenges. Real estate and healthcare experienced less severe declines.

February witnessed a significant downturn in Eurozone equities due to mounting concerns regarding the coronavirus outbreak. The MSCI EMU Index, which tracks large eurozone companies, reported a return of -7.9%. Fears escalated that the virus's effects on travel and business activity could plunge the already fragile Eurozone economy into recession. Germany's Q4 2019 growth was stagnant, while the Eurozone's economy expanded by a mere 0.1% during the same period.

Sectors reliant on economic growth, notably materials and industrials, bore the brunt of the downturn. Conversely, less sensitive sectors like utilities and healthcare demonstrated greater resilience. As corporations released their annual results, future prospects were overshadowed by concerns stemming from the coronavirus outbreak. AB InBev, a major brewer, reported a substantial decline in demand in China during the initial months of 2020 due to the outbreak.

European Central Bank President Christine Lagarde assured that the institution was closely monitoring the situation. Nevertheless, she stated that the crisis had yet to leave a lasting imprint on inflation and did not necessitate an immediate response. In response to the crisis, the Italian government introduced a €3.6 billion stimulus package in March to counteract the outbreak's impact.

Over this period, UK equities mirrored the broader trend by undergoing a decline. The more economically sensitive segments of the market, particularly the oil and gas as well as basic materials sectors, experienced underperformance. However, both globally and domestically exposed segments also endured substantial sell-offs.

Notwithstanding this, the latest economic data and forward-looking indicators pertaining to the UK economy indicated a continual recovery following the decisive outcome of the general election in December 2019. Recent monthly GDP figures displayed a 0.3% expansion in December, signifying post-election resurgence in activity following a -0.3% month-on-month contraction in November. Furthermore, the Office for National Statistics noted a 0.9% rebound in UK retail sales volumes in January after experiencing declines in the preceding two months.

Although the preliminary estimate of the IHS Markit/CIPS composite purchasing managers' index (PMI) for February remained unaltered at 53.3 from January, it continued to stay above the 50-point threshold indicative of expansion. Forward-looking surveys and indicators also pointed toward enhanced business and consumer confidence, in addition to an improved sentiment within the UK residential housing market. However, it is worth noting that these forward-looking signals were based on surveys conducted before the coronavirus crisis escalated on a global scale.

In February, the Japanese market underwent a sharp decline of 10.2%, primarily attributed to a heightened perception of risk prompted by the rapid spread of the coronavirus. During this period, the Japanese yen appreciated significantly, functioning as a safe-haven asset amid periods of uncertainty. Prior to this, the yen had undergone a sharp depreciation without any apparent catalyst.

On February 17, the initial Q4 GDP estimate was released, revealing unexpectedly weak figures. Despite factoring in the consumption tax increase and the substantial typhoon that struck Japan in October, the data proved disappointing. Recent inflation statistics also showed modest underperformance, and official statistics exhibited minimal indications of upward pressure on overall wages. Currently, major companies are undergoing spring wage negotiations led by unions with relatively modest demands.

Although the disruptions stemming from the coronavirus are expected to be transient, various factors, including the impending conclusion of the fiscal year, are inducing Japanese corporations to approach their 2020 forecasts cautiously. Over the same period, Asia ex Japan equities faced a decline, largely due to apprehensions about the virus's impact on regional and global economic growth, along with headwinds created by the strength of the US dollar. Notably, Thailand and Indonesia demonstrated the weakest performance within the MSCI Asia ex Japan index, with Indonesia's currency weakness magnifying negative returns. Similarly, the South Korean market experienced a substantial drop due to the rapid acceleration of COVID-19 cases, transforming it into the nation with the highest caseload outside of China. Meanwhile, India and Malaysia underperformed, with the unexpected resignation of Prime Minister Mahathir Mohamad contributing to Malaysia's uncertainty. In contrast, China displayed a positive return, while Taiwan and Hong Kong concluded with negative returns, although they outperformed the Asia ex Japan index.

Throughout February, the global spread of the coronavirus resulted in a significant decline in riskier assets such as equities, while government bonds demonstrated strong performance. The final week of the month was especially challenging for riskier assets, with some registering their worst performance since 2008. The coronavirus initially emerged in China, and though new cases there began to decline, it spread across international borders, encompassing Western countries, South Korea, Italy, and Iran. Concerns escalated about the potential onset of a global pandemic.

In response to the crisis, government bond yields decreased, leading to price increases. Notably, US 10- and 30-year Treasury yields hit all-time lows. In contrast, yields on investment-grade corporate bonds experienced a relatively less significant decline, while high-yield corporate bonds, especially in the US energy sector, faced weakness. In emerging markets, hard currency investment-grade government and corporate bonds yielded positive returns. However, higher-yielding government bonds experienced losses, with their respective currencies undergoing sharp depreciations against the US dollar. On the other hand, convertible bonds provided investors with a degree of protection against losses.

During the course of the month, the US 10-year bond yield fell to 1.15%, and the 30-year yield declined to 1.67%. Similarly, the 10-year German government bond yield plummeted to -0.61%, while the UK's 10-year bond yield dipped to 0.44%. However, Italian and Spanish 10-year bond yields bucked the trend by increasing, experiencing a sell-off in the final week of the month.