BENGALURU- Global stocks have further to run this year, but the likelihood of a correction of 10 percent or more is high, according to Reuters polls of market strategists, with the severity of the economic hit from the coronavirus outbreak being the biggest risk.
Last year was a bumper year for stocks, with all 17 top global indexes polled by Reuters ending the year higher than where they started. Only one did not rise by a double-digit percentage.
However, all but one are in the red so far this year, with most losses sustained over the past five trading days amid fears that the coronavirus outbreak will become a pandemic, disrupting supply chains and dealing a major hit to the global economy.
Fears of severe economic damage, even a global recession, have sent the MSCI all-country equity index to a 2-1/2-month low, wiping almost $3 trillion off its value this week alone. It has pushed safe-haven gold back towards a seven-year high and benckmark US Treasury bond yields near a record low.
“The S&P 500 dropped 3.4 percent (on Monday), which once upon a time was just a normal bad day in the office, but in our new normal of central banks tacitly and US presidents openly targeting stock prices as the key driver of the global ‘economy’, that kind of decline in plutocratic wealth is both rare and a nasty shock,” said Michael Every, head of financial markets research for Asia-Pacific at Rabobank.
Still, the bull run in global stocks was expected to extend for at least another six months, according to 74 of 100 analysts in response to an additional question. Nearly 60 of those said it would last more than a year.
The Feb. 13-25 poll of more than 250 analysts, brokers and strategists, taken largely before this week’s massive sell-off, showed all 17 indexes were expected to rise over the rest of this year.
But gains will be much weaker than last year and London’s FTSE will end 2020 below where it finished 2019, according to the poll.
What is notable in this survey is that ever-bullish equity strategists are slightly more pessimistic and less confident than in previous polls.
“Global equity markets finally got the memo…that the global economic impact of policy measures to contain China’s coronavirus outbreak will be really, really big,” noted Carl Weinberg, chief economist at High Frequency Economics.
“We have no way of forecasting where or when this crisis will end, how far down equity prices have to go to make sense relative to scaled-down expectations for corporate profits.”
More than half of over 100 analysts said the risk of a correction of 10 percent or more was high, despite growing bets on monetary policy easing, with money markets now pricing rate cuts by the Federal Reserve, the European Central Bank and the Bank of England.
That suggests expectations for monetary policy to be deployed again to head off any economic downturn would not favor stock markets as it did last year.
Economic contagion from the coronavirus outbreak has spread beyond China, a separate Reuters poll on Wednesday showed, with most major Asia economies expected to either slow significantly, halt or shrink outright this quarter. The impact is also being felt globally.
“Our concern is not about any immediate change in economic impact of measures to contain the coronavirus,” added High Frequency’s Weinberg.
“Nothing has changed since last week. What we learned in 2008 – as well as in 1929, 1971, 1982 and 1998 – is that a highly leveraged financial system is vulnerable in many ways to an exogenous shock. The coronavirus and the policy response to it are exactly that kind of exogenous shock.”
Financial markets have reacted more violently, with the recent pace of selling on Wall Street and beyond severe, suggesting the economic blowout from the virus would drag on and have an impact on the first half of 2020 and probably longer.
But with easy policy from central banks set to continue, the increasing schism between the gains in stocks and a global economy likely near its weakest since the financial crisis may extend this year.
Referring to that split, and falling valuations after the latest stocks rout, Rabobank’s Every said: “It is, after all, cheaper to buy, and our underlying asset-pumping infrastructure is still intact, even if global supply chains and the real economy aren’t.” — Reuters