This edition of CIO Weekly Perspectives comes from guest contributors Peter Ru and Sean Jutahkiti of Neuberger Berman’s Emerging Markets Debt team.
In last Monday’s Weekly Perspectives, Multi-Asset Class CIO Erik Knutzen put the ongoing coronavirus outbreak into its global economic and market context.
Today, we will focus on its epicenter, China, assessing from our bases in Shanghai and Singapore the latest intelligence on its threats both to public health and to the local bond market.
As we write on Friday, the number of recorded cases has passed 31,000 and the number of fatalities has reached 638, doubling over the course of the week. The daily death toll in Hubei province is still rising.
Nonetheless, there has also been good news.
First, it is important to note that a proportion of recent cases have come to light not only because people have been newly infected, but because recording has improved. Limited availability of infection-test paper in the early days of the outbreak has been addressed by increased production, leading to more diagnoses—and better containment.
Despite better diagnosis, the daily growth in reported cases has fallen from as much as 50% earlier in the outbreak to around 20%. The Chinese authorities’ strict approach to quarantine appears to be working.
As indicated by the response of financial markets, February 6 was a key date: It marked two weeks since the city of Wuhan was locked down, and two weeks is the incubation period for 2019-nCoV—a slowing infection rate may be a sign that the first wave of contagion has been largely contained. By February 20, we should have more clarity on the extent to which a second wave of contagion was triggered by infected individuals traveling for the Lunar New Year celebrations.
In the meantime, while the World Health Organization has emphasized that “there are no proven, effective therapeutics” for 2019-nCoV, the drug Remdesivir is being trialed as a treatment for intensive-care patients, and China’s state media report promising lab results for Abidol and Darunavir.
Intelligence from our team members in Shanghai suggests a meaningful short-term impact on China’s GDP, given the scale of the economic disruption across everything from retail sales and travel to industrial production.
Data for December and January had been improving in line with our earlier expectations for a global recovery, but data for February and March are likely to be weaker, reflecting the virus impact. We think first-quarter growth in China could be marked down from 6.0% to 4.0% – 5.0%. That estimate assumes ongoing policy support and a stabilization of the outbreak; it would be lowered significantly should businesses and factories remain closed for longer than the two weeks currently expected.
We believe the negative effects from lower growth on China’s corporate and financial bond issuers are likely to be largely offset by policy support. The government has already cut interest rates and injected tens of billions of dollars’ worth of liquidity into the markets, lowering funding costs for financials. For corporates, it has issued a directive for banks to lower lending rates and to be flexible in rolling over debt repayment. If the situation deteriorates, we can expect more government measures such as further cuts to interest rates and reserve requirement ratios.
The property sector has been one area of concern. As long as the outbreak stabilizes, we do not think that full-year sales will be hit too hard, however, as sales volume tends to be concentrated in the second half. Moreover, many property developers had already been actively prefunding their maturities over the past year, reducing risk in their maturity and liquidity schedules. While Hubei has inevitably been impacted, our stress tests indicate that a property-sector portfolio diversified by region is likely to work through the current situation.
Overall, the Emerging Markets Debt team’s views on China exposures have not significantly changed, but we do believe that excessive negative price action in some parts of the Chinese high yield market has created opportunities for selective exposure to issuers with solid liquidity buffers.
In onshore bond markets, we favored increasing health care exposure before the Lunar New Year and adjusting exposures in some more vulnerable areas, including convertibles. We also see value in local duration—especially given the monetary stimulus being deployed against the economic impact of the virus.
Valuations in the Asian high yield credit market more broadly remain attractive, in our view, given the substantial spread pickup over U.S. high yield, although we acknowledge that coronavirus fears may outweigh valuations and cause volatility in the very near term.
The next two weeks are likely to give us a much clearer idea of how well 2019-nCoV has been contained. So far, the signs are that China’s very aggressive public health, monetary and fiscal interventions are taking effect.
In Case You Missed It
- ISM Manufacturing Index: +3.1 to 50.9 in January
- ISM Non-Manufacturing Index: +0.6 to 55.5 in January
- U.S. Employment Report: Nonfarm payrolls increased 225,000 and the unemployment rate increased to 3.6% in January
What to Watch For
- Thursday, February 13:
- U.S. Consumer Price Index
- Friday, February 14:
- Euro Zone 4Q 2019 (Second Preliminary)
- U.S. Retail Sales
Statistics on the Current State of the Market – as of February 7, 2020
|S&P 500 Index||3.2%||3.2%||3.2%|
|Russell 1000 Index||3.2%||3.2%||3.3%|
|Russell 1000 Growth Index||3.8%||3.8%||6.1%|
|Russell 1000 Value Index||2.5%||2.5%||0.3%|
|Russell 2000 Index||2.7%||2.7%||-0.6%|
|MSCI World Index||2.7%||2.7%||2.1%|
|MSCI EAFE Index||1.9%||1.9%||-0.3%|
|MSCI Emerging Markets Index||2.8%||2.8%||-2.0%|
|STOXX Europe 600||2.3%||2.3%||-0.2%|
|FTSE 100 Index||2.5%||2.5%||-1.0%|
|CSI 300 Index||-2.6%||-2.6%||-4.8%|
|Fixed Income & Currency|
|Citigroup 2-Year Treasury Index||-0.1%||-0.1%||0.4%|
|Citigroup 10-Year Treasury Index||-0.5%||-0.5%||3.2%|
|Bloomberg Barclays Municipal Bond Index||-0.1%||-0.1%||1.7%|
|Bloomberg Barclays US Aggregate Bond Index||-0.1%||-0.1%||1.9%|
|Bloomberg Barclays Global Aggregate Index||-0.7%||-0.7%||0.6%|
|S&P/LSTA U.S. Leveraged Loan 100 Index||-0.2%||-0.2%||0.1%|
|ICE BofAML U.S. High Yield Index||0.6%||0.6%||0.6%|
|ICE BofAML Global High Yield Index||0.4%||0.4%||0.5%|
|JP Morgan EMBI Global Diversified Index||0.2%||0.2%||1.7%|
|JP Morgan GBI-EM Global Diversified Index||-0.1%||-0.1%||-1.3%|
|U.S. Dollar per British Pounds||-1.8%||-1.8%||-2.3%|
|U.S. Dollar per Euro||-1.1%||-1.1%||-2.3%|
|U.S. Dollar per Japanese Yen||-1.3%||-1.3%||-1.0%|
|Real & Alternative Assets|
|Alerian MLP Index||-0.2%||-0.2%||-5.8%|
|FTSE EPRA/NAREIT North America Index||1.5%||1.5%||2.8%|
|FTSE EPRA/NAREIT Global Index||1.2%||1.2%||0.8%|
|Bloomberg Commodity Index||-0.1%||-0.1%||-7.4%|
|Gold (NYM $/ozt) Continuous Future||-0.9%||-0.9%||3.3%|
|Crude Oil WTI (NYM $/bbl) Continuous Future||-2.4%||-2.4%||-17.6%|
Source: FactSet, Neuberger Berman.