Just as we thought the global economy was turning a corner for the better, Trump almost started World War III. Thankfully, the impact on the oil price and risk appetite was short-lived. However, the Chinese Lunar New Year – the year of the Metal Rat – brought a new threat to global growth in the form of the COVID19 novel coronavirus.
Commentators are drawing many comparisons with the SARS episode of 2003, but the world is in a very different place these days. China is a key cog in the global growth wheels and the world is only now exiting a multi-quarter manufacturing and Capex slowdown. Back in 2003, China accounted for only 8% of World GDP; now it is 20%! Globalisation has integrated not only supply chains, but also capital flows and cross-border tourism. With the rat sneezing, the world is bound to catch a cold. While numerous estimates suggest a very modest 0.2 percentage point downside to global growth this year, the truth is we just do not know how bad this virus can get and how severe the secondary spill-overs to small open economies, such as South Africa, might be.
The US fixed income market is telling us we should be concerned about a longer-lasting impact on already subdued growth, but US equities say not to be afraid. This may be a perverse symptom of expected central bank easing in response to a potential global pandemic. Yet even if the rat is feeling unwell, it is surfing the global liquidity wave brought about by central banks’ balance sheet expansion.
So grab your surfboard, but take your face-mask, just in case! As always, risk management is a key factor in successful investing.
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