Do not get infected

The losses in equities hurt. The S&P 500 in the USA and the Dax in Germany have fallen by almost 15% in just one week since the number of infections outside China rose. This clearly shows the uncertainty among investors.

At the moment, it is not yet possible to assess the economic consequences of the virus. But this much is clear: globally, companies are suffering from a lack of deliveries and revenues from China. This slows down industrial production and, as a consequence, overall economic growth. The eurozone, which is particularly dependent on the manufacturing industry, is one of the main victims, along with China itself. Declining economic growth (GDP) in the first quarter must be taken into account for both economic areas. By contrast, the damage to the US economy is likely to be less significant thanks to the strong domestic economy.

In China there are at least signs that companies are slowly ramping up their production. The daily passenger and freight volumes measurable in the short term are also recovering in small steps. Daily passenger numbers doubled in February, although they are still far from normal.

We currently still assume that Covid-19 will have an impact on global growth rates, but will not lead to a deep recession. If the threat decreases, there should even be catch-up effects, even if not all production losses can be compensated. The major central banks will also provide support in cases of doubt. Interest rate cuts by the European Central Bank and the US Federal Reserve, which we predicted in our 2020 outlook, remain an integral part of our scenario.

Equities not (yet) cheap

Uncertainty about the concrete consequences for companies currently makes it difficult, especially for equities, to find a stable floor in the short term. For a long time, the markets in the developed countries ignored the dangers posed by Covid-19, whose increasing spread from mid-January onwards mainly affected China. It was not until around 20 February that sentiment in Western countries turned. The MSCI equity indices show that, at regional level, China and the emerging markets have held up best since the beginning of the year (see table).

Despite the losses, however, equity valuations based on the price-earnings ratio have not yet moved much and are not yet favourable, especially in the USA and Switzerland. This is due to earnings expectations for 2020, which have been revised downwards in all markets within the last month.

Tactical recommendation

At a meeting on Friday, the Investment Committee has confirmed the portfolio allocation. In the portfolios, the losses in equities were cushioned by price gains in government bonds and gold, for example. This shows how important it is to diversify the portfolio broadly. We are continuing to monitor the situation closely and are constantly assessing new developments over the next few days so that we can react quickly.

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