Risk-off sentiment dominated global markets in January following the outbreak and rapid global spread of the coronavirus, amid fears it would present major headwinds for global growth and trade, especially for China. This sent most equity markets lower for the month, while bond markets also gave up ground amid the deteriorating sentiment.
Some respite came in the form of a smooth Brexit by the UK from the EU and the signing of the Phase One trade agreement between the US and China. Locally, SA equities and bonds sold off in line with global markets, with the prospect of further ratings downgrades and declining growth forecasts also weighing on investor sentiment.
Looking at global equity market returns (all in US$), the MSCI All Country World Index returned -1.1%. Developed markets outperformed emerging markets, with the MSCI World Index delivering -0.6% and the MSCI Emerging Markets Index returning -4.7%.
US
In economic news, GDP growth for Q4 2019 increased by 2.1% in line with market expectations. Inflation for December 2019 increased by 2.3% while unemployment held steady at 3.5%, the lowest level since 1969.
The Federal Reserve kept rates unchanged at its first policy meeting for the year, as expected, leaving investors with the sense that imminent changes to borrowing costs were unlikely in the near-term. The Fed described its monetary policy stance as being appropriate to support sustained economic growth and low unemployment and inflation.
Although coronavirus-related fears sent markets lower, the threat of an escalation in the ongoing trade war dissipated after the US and China signed Phase One of a new trade deal, which will see China increase its purchases of US goods and services to US$200 billion over the next two years.
US equities were mixed, as investors focused on the impact of trade and growth disruptions stemming from the coronavirus pandemic. The S&P 500 was unchanged at 0%.
UK AND EUROPE
The main news coming out of Europe was the official departure of the UK from the European Union at the end of January, ending a tumultuous 3.5-year departure process. The UK will remain part of the EU single economy and customs union in 2020 as they negotiate terms of a free-trade deal.
In economic news, the BoE held its bank rate at 0.75% at its first policy meeting for the year. GDP forecasts were downgraded for 2020 to 0.8% (from 1.2%). The central bank also indicated that interest rates may be cut if growth does not improve.
Meanwhile, regional bourses were hit by worries around the coronavirus. Investors were also left with a sense of unease after news surfaced that the UK and EU plan to defy the US on Huawei sanctions, compounded by a lack in progress in the ongoing dispute over autos and digital trade. The UK’s FTSE 100 returned -3.8%.
ASIA PACIFIC MARKETS
Major Asian equity markets closed the month lower as the coronavirus outbreak remained the main focus for investors. Chinese markets were closed for the latter half of January due to the Lunar New year, however reopened 7.7% down as the effects of the virus weighed on investor sentiment.
Adding to investor concerns was the news that GDP growth for 2019 fell to 6.0% in Q4 2019, the weakest since Q1 1992. For 2019 the economy grew at 6.1%, its slowest pace in 29 years, but within the government’s target range of 6.0% – 6.5%. The economy is expected to remain under pressure in 2020, with the Phase One trade deal and increased business optimism providing some respite. To help stimulate economic growth the PBoC surprisingly cut its reverse repo rate by 10bps and announced a CNY1.2 trillion injection into money markets through reverse bond repurchase agreements.
In other news, Hong Kong’s Hang Seng Index sold off sharply as the fallout from the coronavirus was compounded by Moody’s downgrade of the government’s credit rating from Aa2 to Aa3. The ratings agency cited the impact of recent political unrest as the driving factor.
In Japan, equities closed the month lower in line with major Asian markets The BoJ left the short-term policy rate at -0.1% and retained its stance that rates will stay at current or lower levels in order to reach the 2.0% inflation target. Inflation rose to 0.8% in December 2019, above market consensus of 0.4%. Japan’s Nikkei 225 delivered -1.6% and the MSCI China -4.8% (in US$).
SOUTH AFRICA
South African equities sold off in January in line with emerging markets, as risk-off sentiment due to the coronavirus outbreak weighed on investors.
The SARB unexpectedly cut the repo rate by 25bps to 6.25% at its January meeting, citing the country’s persistent economic vulnerability as one of the major catalysts behind the move. This marked the first rate cut since July 2019, bringing the repo rate to its lowest level since November 2015.
The SARB also lowered its SA growth forecast for 2019 to 0.4% (from 0.5%), while the forecasts for 2020 and 2021 decreased to 1.2% (from 1.4%) and 1.6% (from 1.7%) respectively. Further downward revisions also came from the IMF, to 0.8% for 2020 (from 1.1%) and 1.0% in 2021 (from 1.4%), citing structural constraints and deteriorating public finances as concerns.
Other news weighing on investor sentiment was Moody’s downgrade of the Land Bank to junk status, stating that the bank was less likely to receive financial support from the state given the government’s fiscal challenges.
The FTSE/JSE ALSI declined -1.7% in January. The FTSE/JSE Capped SWIX All Share Index, which we use as the equity benchmark for most of our client mandates, returned -2.6%.
Finally, the rand sold off sharply against all three major currencies in January along with most other emerging market currencies. It depreciated 6.6% against the US dollar, 6.1% against the pound sterling and 5.2% versus the euro.
Article by Prudential Investment Managers