Weekly View - Green in Davos
The coronavirus outbreak centred in Wuhan, China, has resulted in a state-imposed travel ban during China’s busiest travel season, the Lunar New Year holiday. The current outbreak resembles the Sars virus that plagued China between 2002-2003 and took eight months to contain. Economists fear this strain could negatively impact growth in a year when China is expected to realise its slowest growth rate in nearly three decades. The S&P Global Ratings credit agency warned that the disease could cut as much as 1.2% off Chinese growth in 2020 if the situation worsens considerably. Chinese markets have already closed for the Lunar New Year holiday but if prices continue to deteriorate, we will seek out buying opportunities in Chinese and Asian equities.
The mood was subdued in Davos this year as global business leaders ruminated over various rising risks - from trade tensions to climate change - at a time when equity valuations are at their highest level since the TMT bubble. Meanwhile, the European Central Bank left monetary policy unchanged as expected. The Bank has now launched its review as Europe’s manufacturing sector shows signs of a slow recovery. Bank President Christine Lagarde hinted at the possibility of the ECB’s taking a more proactive approach on climate change. This echoes the tone set by Bank of England governor, Mark Carney. England’s central bank will convene on Thursday, with markets pricing in a 50/50 chance of a rate cut. Given strong European and UK PMIs and solid UK employment data, we think the Bank will keep rates on hold until March.
Elsewhere, regional elections held on Sunday in Italy’s Emilia Romagna delivered a defeat to the right-wing coalition fronted by the League in favour of the centre-left Democratic party. This reduces the probability of early snap general elections in Italy. Because national-level polls continue to show a solid lead for the centre-right, with the League in the lead, neither the Democratic party nor the Five Star Movement – together forming the government’s current coalition – want elections at this point.