Economic Commentary – Feb 2020

February 12th, 2020, by Chris Davis

Always had a vision, always had high, high hopes

Financial markets entered 2020 with optimism. Geopolitical tensions had eased and there were tentative signs of a manufacturing pickup in activity that had plagued the sector and hampered the global economy for most of 2019.

Public Unrest

However, events in early January reminded the world of tensions in the Middle East. Following the US assassination of Iranian military commander Qassem Solemani, Iran retaliated by firing missiles at American bases in Iraq. With tensions heightened, Iran shot down a Ukrainian International Airlines flight, killing 176, including 82 Iranians. After authorities initially blamed the crash on a technical failure, when the truth subsequently emerged the public anti-American sentiment quickly turned on the regime. Being dubbed “Iran’s equivalent of the Chernobyl disaster” by Iranian political analysts, the anger and distrust of the country’s leadership is being exacerbated by economic sanctions.

Chinese authorities have also faced unprecedented levels of internal criticism following the death of Li Wenliang, the 30 year old doctor who initially alerted colleagues to the spread of a “pneumonia of unknown cause”. Whilst the authorities were initially praised for telling the world about the virus it has now become clear that their initial reaction was to clamp down on the spread of news, and despite imposing severe quarantine restrictions on travel, the virus has continued to spread rapidly. To date the virus has spread to over 30 countries and confirmed fatalities of over 1,000, exceeding deaths from the SARS epidemic in 2003.

If the authorities were slow to react to the virus, the same cannot be said for its support of the financial markets. As markets reopened post extended lunar new year holiday China’s central bank (PBOC) injected 1.2 trillion yuan ($174 billion) of liquidity. A ‘national team’ of Chinese state-run institutional investors are ready to underpin the market. The Chinese regulator has also instructed mutual funds to limit the net daily sales, ensuring the market selling is kept in check.

Coronavirus will at least have a short-term impact on the domestic and global economy. In 2003 the SARS outbreak caused Chinese GDP growth to slow by 1.4% in the second quarter of that year. With China’s share of global GDP more than 4 times as large as it was in 2003, a similar slowdown today would take c.0.2% off global GDP growth. Economists forecast that first quarter growth in China will slow to 4.8% compared to the 2019 annual rate of 6.1%.

We already know that the outbreak is having a detrimental effect on retail, leisure and travel sectors, but there will also be disruptions to global supply chains. Given China’s propensity to consume raw materials, oil and industrial metal prices have sold off substantially.

Chris Davis
Chief Investment Officer

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