Coronavirus reshapes our market views

Esta semana presentamos a Mike Pyle, jefe estratega de inversiones globales de BlackRock

El coronavirus se está extendiendo a más países, planteando una nueva dimensión mundial de esta epidemia y afectando a los mercados con volatilidad e incertidumbre. Como resultado, el BlackRock Investment Institute ha disminuido nuestra perspectiva de crecimiento global.

En este episodio de The Bid, Mike Pyle, jefe global de estrategias de inversiones, analiza los efectos que creemos que el coronavirus tendrá en los mercados globales.

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  • Jack Aldrich: Last week, the coronavirus drove a massive market sell-off. The S&P 500 saw its worst week since the Global Financial Crisis and the yield curve inverted for the third time since October of 2019.

    Welcome to The Bid. I’m your host, Jack Aldrich. Today, Mike Pyle, BlackRock’s Global Chief Investment Strategist, walks us through the global impact of the coronavirus and why it’s changed our market views for the year.

    Mike, thanks so much for being here.

    Mike Pyle: Thanks for having me.

    Jack Aldrich: To put it in very technical terms, last week was a bad week for markets. Walk us through what happened and why.

    Mike Pyle: My basic assessment as to what occurred was up until the very tail end of the week before last, markets were effectively discounting coronavirus as a China-specific public health challenge that had global economic repercussions, but fundamentally something that was contained to China and the region; and then propagating out as an economic matter. And I think what we saw at the very tail end of the week before last, and certainly throughout last week, was a growing reassessment of that underlying assumption from market participants as it appeared as if the dimensions of the public health challenge were spilling over out of China into other parts of the world, including increasingly Europe and other developed markets. And I think that that reassessment from a China public health challenge to something with regional and global economic implications to a global public health challenge with even larger global economic implications, potentially, is really what drove that reassessment and the very extreme market moves we saw.

    Jack Aldrich: So markets have been at all-time highs up until very recently, and there’s been debate as to whether we’ve been due or even overdue for a market correction, or an instance in which markets fall ten percent or more from a recent high. That obviously happened last week, with markets falling into a correction quicker than they ever had in history. Do you think that’s just the coronavirus driving this or are there other market factors at play?

    Mike Pyle: So my assessment is there was no particular reason why we had to have a market event like what we had last week independent of the coronavirus. This continues to be an economy where the underlying health is quite strong; no particular alarm bells out there ringing in terms of recession risk, absent the coronavirus. And so to my eyes, yes, can there be air pockets and what have you that markets hit from time to time? Of course. But the underlying momentum of the economy was quite strong, and so it didn’t feel like this was due in some important way. But I think in my eyes, the real emergence of this different phase of the coronavirus challenge really was just that core driver across really the course of last week. You might add, a little bit, I think we’ve been saying for some time that the U.S. election presents a headwind to markets in 2020, in particular, U.S. markets, principally in light of just the really divergent potential outcomes on the table in November between the two parties. I think maybe we saw that step in a little bit last week, because I think markets are beginning to pay more attention to what is happening around the Democratic primary election, but I don’t want to overstate that. To me, just the overwhelming driver last week was this new phase of the coronavirus challenge.

    Jack Aldrich: And you mentioned how we were thinking about the markets beforehand, our base case being generally that global growth would edge higher this year. How have recent events changed that and how has this coronavirus development affected that view?

    Mike Pyle: I think our view coming into the year exactly as you say was growth was going to edge higher, led by some of the more cyclical aspects of the global economy: trade, capex, led by places like the emerging markets and Japan. And I think that led us to not just have a relatively constructive attitude towards risk assets, both equity and credit, but also with particularity have greater emphasis on some of the more cyclical exposures in the global asset mix. And so, I think what the past week has shown is that is not really an environment that’s operative any longer, and the coronavirus and its impact has really changed that. So, we wanted to offer a reassessed view of what the global outlook looks like, and I think it looks like a couple of things. One, the coronavirus challenge is very clearly now globally a quite material economic event. We think that economic growth is likely to take a step down in level terms across the course of 2020, so this isn’t a world of growth edging up; it’s a world of growth taking a downshift. That said, our base case, to talk constructively for a moment, is still that this is a temporary shock of uncertain duration, but temporary, and when we get to the far side of this shock, we should see the global economy reaccelerate quite rapidly and financial markets follow behind. Secondly, it continues to be the case that we don’t see as our base case the U.S. or global economy falling into a recession; we see the expansion continuing in our base case. That may be a little bit different for Europe, for Japan, some of these places that were already a little bit in the doldrums. But the underlying momentum in the U.S. was quite robust entering this challenge. And we think that that still matters. Third, I think we’re going to see a pretty meaningful policy response from central banks and fiscal policymakers globally around liquidity support, around monetary easing, around fiscal easing, we’re beginning to see that conversation come together. I think there are some risks as well. I don’t want to belabor my answer here, but I do think it’s probably worth talking through some risks too.

    Jack Aldrich: And what are those risks?

    Mike Pyle: One, the base case that I articulated was one of a real slowdown, but ultimately, a trajectory that because of policy intervention, because of the underlying momentum in the economy, because of ultimately we think the temporary nature of the shock and the re-acceleration on the other side of it, keeps the U.S. and the globe out of a recession. But I think it’s important to highlight some of the key risks that can mean there’s a downside year, outside that base case. The first is the one I just pointed to, we’re really focused on what is the duration of this shock going to be? And I think the best evidence early on is going to be, is China successful in bringing its economy back online without having the secondary outbreaks of a sufficient scale that cause them to have to pause or reverse? The second is just how big is the economic shock itself going to be in the major developed markets? Obviously, we’re seeing significant outbreak in Italy, other places in Europe now, early reports of growing cases in the U.S., how significant does that end up being? And importantly, what is the magnitude of the public health response necessary to bring the outbreak under control? That will go a long way towards determining how deep the impact is. And then third I think goes to the policy response. How effective are agencies of government in terms of actually effectuating a policy response? And then, how effective is it? I think reasons for both optimism but also reasons for a bit of pause on both of those sides. On the optimistic side, I think we are going to see real activism from policymakers around the globe. Central bankers are pointing in the direction of significant new easing, it looks as if there should be real liquidity support put in place for businesses, and other actors in the economy that are strained because of the abrupt falloff in cash flows or income, what have you. And then importantly, also going to see real change in fiscal policy. We’ve already seen that from China, we’ve seen it from Hong Kong, I think we’ll hear announcements from other countries like Japan, Korea, Italy, even Germany, it wouldn't surprise me if we ultimately saw something from the United States. The degree of policy response and the degree of its effectiveness, particularly around this question of making sure that companies especially small and medium companies, and firms that face this abrupt falloff in income from the economic shock, have the tools available to get through the crisis. These are often times very healthy businesses that have just run into a once-in-a-century storm, and we need to make sure that fundamentally healthy businesses aren’t taken offline permanently because of that. And that to us is the way this turns into something quite a bit more pernicious if these liquidity and cash flow challenges that could arise, could be abated with effective policy, aren’t effectively abated with policy, that is a world where you can see a much more vicious cycle take hold.

    Jack Aldrich: We’ve been talking about how this has moved recently and rapidly from being a local phenomenon to now one of global proportions: it originated in China, the world’s second-largest economy. How are you thinking about the growth story in China and how what happened there might flow through to the rest of the world?

    Mike Pyle: I think it’s wise to look at China for a slightly different reason than was the case a couple of weeks ago. The reason to look at China a couple of weeks ago was principally because this was the epicenter of the coronavirus outbreak; because we were mapping the way it flowed through from a very abrupt economic slowdown in China through, on both the supply and the demand sides, to the global economy. And I think we heard a fair amount about this from a number of sources, but one illustrative one was Apple, which gave revised guidance a couple of weeks ago. So that effectively, what we’re seeing in China is going to pretty meaningfully impact our Q1 results, it’s going to matter both in terms of the supply side, our ability to get product done, because so many of our supply chains are deeply embedded within China; and also is mattering on the demand side, the demand for our product, because China is such a significant global market for us, it’s also taking a big hit. You see that manifest in a bunch of different ways including things like corporate earnings. I think the conversation today is still about that clearly, but it’s also about, can we take any lessons from what the shape of the economic shock is going to look like in other countries that have to confront significant coronavirus outbreaks, by virtue of what we’ve seen in China? And there I’d say a couple of things. One, it seems as if one way in which economic activity is really impacted is by the public health measures that are taken to confront an outbreak. And while I think it is extremely unlikely that we would see measures of the kind taken in China able to be taken in other parts of the world, nonetheless, that basic insight prevails that beyond the outbreak itself, the measures taken to combat slow economic activity. The other thing that I think is worth keeping an eye on is now that China looks to be – and the WHO made this consensus last week – now that it has really changed the trajectory of the outbreak in China, how are they going to go about restarting their economy and how successful are they going to be at that? I think we have the view that they should be able to re-accelerate relatively quickly with the big risk that as they do so, are there secondary or tertiary outbreaks that mean that they have to slow back down and put restrictions back in place? So that in our eyes is one of the key things we’re looking at, as China restarts, are they successful in doing it? Or do they have to put the brakes on again?

    Jack Aldrich: And to that point, I’m struck by how much uncertainty there is in this coronavirus outbreak in terms of the path and trajectory of the disease, in terms of the world really having not seen something like this before in such a globalized era. As you just think about how much we don’t know and how uncertain this coming period will be, how do you think about markets; how do you think about investing?

    Mike Pyle: This is obviously the most important question for our investors financially, and the advice that we’re giving, this is a moment to be cautious, but this is not a moment to panic. It’s a moment to stay invested for the long term and see that through to your financial goals. This is a moment to be back at your home base in terms of the benchmarks that you have in your portfolios around equities, credit, other risk assets. Now as I said, we articulated a view coming into the year around being pro-risk and being more cyclically oriented. That world isn’t the world we’re in anymore. And so, what we’ve done in our own portfolios is bring those risks back to benchmark weight to reflect the changed world. Like I said, we think that on the backside of this shock, there is going to be a pretty significant re-acceleration in economic activity and financial market activity. And the dislocations that we are seeing now are ultimately going to provide investors with pretty significant opportunity. And so what we’re spending the next period of days, weeks, as we go through this shock is, being in regular contact with our investors, shaping that debate here within the firm, and identifying the best opportunities for our clients to come out the other side of this, all the stronger. But again, I think the important message is, this is a time to be somewhat cautious and back at the home base, but it’s also an important time to be really focused on staying invested, staying in markets, and recognizing that our goals are long term, not the next 30 or 60 days.

    Jack Aldrich: Absolutely. So, you talked about thinking about this over a long time horizon and there being some opportunities. Could you describe some of those opportunities that you’re seeing?

    Mike Pyle: Yeah. Like I said, our overweight into risk assets was really around some of the more cyclical exposures out there: emerging markets, Japan, high yield, what have you. We pulled back a few of those, both Japan and emerging markets in particular on the equity side, and are looking for some more resilient equity market exposures and it’s things like the minimum volatility factor exposure, the quality factor exposure, companies that have really high quality balance sheets, cash flows, that look set to be resilient against a storm. Those are places that tend to have really good runs of performance in difficult market environments. And lastly, I think it’s important to say that even with the rally we’ve seen, U.S. Treasuries continue to perform this really core ballast role in portfolios and standing by the allocations that you have right now, is an important thing to do while these challenges are working their way through the system.

    Jack Aldrich: Fantastic. Well Mike, you’ve given us tons to think about here, and I think we would love to be talking with you more as these developments continue and as we here at BlackRock continue to keep our eyes on this. Thanks so much for being here today.

    Mike Pyle: Thanks for having me.