• Principal Global Investors global strategist Seema Shah expects the main investment themes for 2020 to remain relevant despite the downside risks from coronavirus. She likes international equities including emerging Asia from a long-term strategic positioning.
• Now is different to the SARS outbreak in 2003. Firstly, asset valuations are more expensive leaving risk assets more vulnerable to shift in sentiment. Social media allows information to travel much faster. Finally, the global supply chain is now more interconnected.
• Despite this, EMs should do well, the growth outlook is good plus scope for monetary and fiscal stimulus remains. But need to know your countries. Domestic politics coming ahead of macro stability is some places.
• Shah likes parts of South Korea, including the chipmakers, also China consumer discretionary stocks (good entry point may come). Brazilian policies are more sensible than others. Turkey and South Africa look attractive from valuation perspective but are vulnerable in periods of risk off.
• European equities had good year in 2019 but they remain undervalued, leaving valuation more attractive than US equities.
• China 2020 GDP forecast cut to 4.5% (Bloomberg economics). If Q1 China dip persists then the foundation of global growth starts to fall away. During SARS purchases were deferred not cancelled. But if the production side takes a big hit and stocks get run down, they would start to worry about the health of the global economy.
• No good precedent to estimate a vaccine timeline. During Ebola it took several outbreaks before a vaccine came to market.
• Some pharma stocks rallying on prospects for developing the vaccine. But the biggest revenues are those for chronic conditions. It may not therefore be profitable for some pharma companies to successfully develop a coronavirus vaccine.
Why does this matter? Is Shah’s view is correct and the impact of coronavirus is contained to Q1 global growth will remain on track for a modest pickup from last year. Equity markets will remain sanguine and any weakness related to coronavirus should present a buying opportunity. But expect volatility in pharma stocks as reality catches up with the positive headline on vaccines. [Bullish equities]
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