Market Insights – February 11st, 2020

Each week, a team of experts shares its market views with you.

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Essentials

Commodities – and especially the most cyclical ones – have been hit hard by the coronavirus outbreak in China. Many indexes are now at a two-year low, which means there will be attractive buy opportunities once we have a clearer idea of economic growth going forward.

US companies keep creating jobs at a solid pace even though unemployment is already at a 50-year low. Another 225,000 jobs were added in January, a sign of a tight labour market. Wage growth, however, remained moderate, coming in at around 3% year on year.

There’s good news for US GDP growth in 2020: last week’s economic data largely outstripped economists’ forecasts. Manufacturing, which was under pressure throughout last year, perked up, with the manufacturing ISM moving back into expansion territory. The services sector remained firm.

 

 

 

A brief respite for emerging markets

The ease in trade tensions has materialized before the end-of-year celebrations, but few market observers expect the dispute between the USA and China to be over for good. And they are probably right – the geopolitical situation in 2020 will likely continue to cause renewed market volatility. But let’s use this brief respite to focus on the fundamentals in the emerging markets.

Let’s start with a question that often comes up : how quickly will the Chinese economy grow in 2020? Each year, many economists try to predict whether growth will come in at 5.9% or 6.0%. But we see no point in that exercise. The fact is that China’s economy is gradually slowing, and given its current size, it would require some extremely large-scale stimulus to reverse that trend. And such measures would only be taken in a crisis – a situation such as the liquidity injected into the economy earlier this month to lessen the economic impact of coronavirus. If GDP growth remains within the 5.5–6% range in 2020, that means Beijing still has its hands firmly on the helm. The current normalisation looks set to continue, and it is unlikely that growth will re-accelerate any time soon.

Meanwhile, the recent economic indicators paint a rosy picture for emerging markets. First of all, earnings should grow faster than in the USA and Europe, despite the temporary upheaval caused by the coronavirus outbreak. Companies are no longer feeling the effects of the customs tariffs quite so much, as reflected in the uptick in exports and in China’s manufacturing PMI at the end of 2019. Secondly, credit conditions have improved significantly in China since the end of the debt deleveraging in 2018, providing some indication of the direction the economy is heading.

Although these are all reasons to be optimistic, it is important to remember that emerging markets’ solid performance in 2019 was largely down to expanding multiples, which means that equities have already partially priced in the forecast growth in earnings in 2020. We will continue to closely watch out for the slightest sign of weakness, in case the economic recovery or geopolitical stability turn out to be more fragile than expected. That said, it seems to us too early to adopt a too conservative approach, which is why our exposure reflects the expectations of a continued outperformance in emerging markets.

Switzerland – relative valuations are re-turning to normal

Investors’ appetite for risk has been growing since the end of the summer, which has weighed on the Swiss stock market – or at least on its defensive blue chips, which account for much of the SMI and SPI indexes. Although investors have briefly turned back to defensive stocks because of the fears surrounding the coronavirus outbreak, we expect this trend to continue in early 2020 as global economic growth picks up.

One advantage of this recent underperformance is that Swiss stocks, which were still very expensive a few months ago, are now trading at a lower premium relative to global equities, making them slightly more attractive.

At the macro level, the Swiss economy will be lifted by the uptick in global growth. Swiss SMEs in particular should get a boost from the much brighter economic climate in the countries they trade with the most. This includes Germany, where leading economic indicators have improved considerably. 

We still prefer small cyclical stocks to blue chips. Our geographical allocation remains neutral – even if prices seem reasonable in relative terms, the Swiss stock market is still one of the most expensive among developed countries. What’s more, if the Swiss franc continues to rise and the SNB can’t push rates further into negative territory, this could soon weigh on Swiss exporters, damaging the domestic economy.

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