HH Coronavirus: A Black Swan Event For Global Equity Markets

We are also carefully assessing our positions in stocks with significant exposure to the virus, in particular holdings linked to the tourism and travel businesses. For example, we have taken action on some of the most exposed stocks (Airport of Thailand, Krung Thai Bank). So far, our portfolios have shown some downside resilience and we expect them to provide even better protection over the longer term.

During significant market corrections, dispersion usually remains low initially, as systematic de-risking negatively impacts all stocks indiscriminately. We expect more dispersion to materialise in the coming weeks should this correction persist, as stocks with more robust fundamentals and valuation levels should ultimately benefit from better investor confidence.

We witnessed similar behaviour in October 2008 from our global portfolio, when the strategy posted a downside capture above 85% while the market was losing more than 20%.

Looking ahead

The sell-off was borne out of the combination of fears for expected future economic growth, extreme valuations and market specifics such as the weight of systematic and passive strategy positions. The number of people affected by the disease surged outside of Asia, meaningfully increasing the possibility of seeing the same type of massive quarantines that were implemented in China and jolting investors out of complacency. In Europe and the US, big corporations have advised their employees to avoid travelling for business, schools have closed, hotels have been quarantined and summits cancelled in a global effort to stop the propagation.

But how much can this economic lockup weigh on growth? Looking at the epidemic literature, the standard influenza model assumes schools will close with a 90% compliance rate and households imposing quarantines of two weeks with a 60% compliance rate (adult and child social distancing). This is what has been implemented in China in the most affected region. Taking the average GDP per capita for two weeks allows us to proxy the impact on countries’ GDP. The results of our computations based on these hypotheses show that the impact would be -2.3% of growth. This would leave China with a tepid 3% growth and the US with a marginally negative expected GDP, while Europe would be pushed into recession, given its lower potential rate of growth.

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