The spread of coronavirus, now classified as Covid-19, beyond China’s borders (8,600 cases outside China at the end of the month, compared to 80,000 within China and 67,000 in the province of Hubei alone) and the clear disruption of the supply chains for a large swathe of global industry finally overcame the markets’ stoicism in the last days of February. Between the 18th and 29th of the month, the S&P 500 in the US and the Stoxx 600 in Europe both dropped by nearly 13%, taking their losses for the year to date to 8.6% and 9.7% respectively. The rise in risk aversion was further illustrated by a fresh drop in interest rates, with the yield on US 10-year bonds falling from 1.91% to 1.14% and on the German Bund from -0.19% to -0.61%.
In its interim Economic Outlook report, the OECD put the impact of the pandemic at 0.5% of GDP, and now expects the global economy to grow by 2.4% in 2020. The economic picture that emerges from a few company releases confirms weaker growth than previously expected, although there are no signs of a recession yet.
Looking at international trade, which is first in the firing line, Kuehne & Nagel report a 30% contraction in sea freight and a 20% reduction in air cargo in China, but have also announced that 90% of its staff in the country are back at work, either at their workplace or remotely. Although the company is expecting that, after the first quarter, business levels will be in line with 2019, it has stressed the particularly high level of uncertainty and in response has reduced by one-third the dividend to be paid this year on last year’s earnings.
BASF expects global growth to fall to 2% and has stressed weak industrial demand that is likely to limit growth in the chemicals industry to 1.2% (from 1.8% in 2019). Equipment manufacturer Bobst Group reported an 8% drop in packaging sector demand in 2019. Investment in this sector is considered an accurate lead indicator for consumer industries. On the topic of investment, Schneider Electric expects organic growth of between 1% and 3% in 2020, from 6.6% in 2018 and 4.2% in 2019, with the energy management business holding up better than automation.
The market correction was not uniform and stocks viewed as defensive got off lighter than the rest of the market, despite valuations that are high and in some cases excessive. With their valuation discipline, the Rouvier Valeurs and Rouvier Europe compartments have seen significant falls over the first two months of the year (10% and 11.6% respectively) whilst Rouvier Évolution and Rouvier Patrimoine, with exposure limited to 51% and 18% respectively, are down by 4.9% and 1.4%. It is worth noting the equity allocation of the latter has cushioned the market impact, with a fall limited to 5.7%.
Looking beyond these first two months of the year, we will not be tempted by the siren voices that tell us that the regime of low interest rates has made the notion of valuation irrelevant, and will continue to apply the two components of our Quality & Value approach with discipline and for the long term.