As there is no historical reference framework for the coronavirus (typical of a “black swan” event), it is difficult to assess the impact of the outbreak, how long it will last and how effective measures taken to contain it will ultimately be. Companies across the globe have issued profit warnings due to the impact of the virus, but very few have been able to quantify the impact beyond the next quarter. When looking at past exogenous shocks however, we see that economic disruption can be sizeable, but is usually short-lived. China’s manufacturing PMI in February dropped below 36 (lower than during the GFC), demonstrating the extreme impact of the outbreak, but the A-shares market shrugged off this bad print as daily infections in China have peaked and liquidity measures have been implemented. Year-to-date, that market has recouped all its losses. For equity markets in developed countries, we expect nervousness to continue as long as infections have not peaked and as the crisis could last longer than in China because it is more difficult to lock down entire cities in those countries. Continued beta de-risking from systematic strategies could also fuel high-level volatility.
Looking beyond the next couple of months, as long-term investors, we are ready to add to our investments in “qualitative companies that are able to grow their top line through the cycle, have competitive advantages, relatively low leverage, low vulnerability to disruptive forces and are ideally able to capitalize on the United Nations’ Sustainable Development Goals.” Interestingly, these companies have held their own in this recent market rout. Last but not least, we would like to underscore the fact that the yield gap (global dividend yield – US 10-year yield) is close to 2%, a level last seen in 2009 and 2011. Historically, this level has turned out to be an important valuation support and coincided with a turnaround point for equity returns (after at least a bit over two months).
