Natixis IM Solutions: Economic impact of coronavirus

March 2, 2020

Esty Dwek, Head of Global Market Strategy at Natixis Investment Managers Solutions comments on the developments regarding the coronavirus and its (expected) economic impact:

Market Flash – Coronavirus 2 March 2020
- Markets ended last week with their worst week since 2008. On a year-to-date basis, the S&P500 is down 8.5%, the Stoxx50 is down 9.6% and the MSCI EM -9.8%.
- Today is looking better, thanks to major central banks (including the Fed) stating that they are ready to step in as needed to ensure ‘market stability’.
- Sovereign bond yields continue to fall, with US 10-year Treasury yields at 1.10% and German Bunds at -0.62%. while we are already at extreme levels, this move can continue, though the bulk should be done.
- Downside risks remain for equities as the economic impact rises, but the rebound can be quick once fears ease.
- The first Chinese economic data since the outbreak confirmed a dismal picture with both manufacturing and services PMIs dropping sharply.
- Recession fears are unlikely to abate as long as the virus spreads across developed countries, but, for now, we continue to believe that 2020 growth will not be entirely derailed.

Economic impact
- Q1 growth is going to be very weak, and Q2 will likely be impacted as well as the virus’ spread is not over
- Europe is at risk of recession given already very weak growth at the end of 2019, but this may not last for all of 2020
- Japan is likely already in recession, but should gradually recover later in the year, though the sales tax hike remains a big hurdle
- China’s first quarter growth could be 0, but the activity appears to be starting again
- The US economy should prove more resilient
- We expect to see more fiscal support, in Asia, and probably in Europe as well. Given the US’ recent spending, we may not see as much there.

What we are watching
- We continue to monitor contagion across Europe as it is starting to impact travel and entertainment there
- We are keeping an eye on contagion in the US, as this would spur bigger fears (global pandemic), and possibly another leg down in markets
- On a more positive note, cases in China are falling, so containment measures appear to work
- Also, population density and healthcare are better in Europe and the US, suggesting less of an impact than in China