Weekly View - Not over ’til it’s over
Encouraging news arrived at the end of last week as new cases of coronavirus appeared to slow both in China and the rest of the world. Although the number of deaths from the virus continues to grow, if confirmed, the deceleration of new cases suggests that preventative measures are having their desired effect. In an effort to offset the virus’s toll on economic growth, Beijing announced it will halve tariffs on a portion of US imports. This cut will take effect from 14 February, when the “phase-one” trade deal with the US is due to take effect. Global equity markets rallied as a result. While we wait for the virus’s impact on Asia’s economy to become clear, we are starting to selectively buy some Chinese internet companies and remain positive on India.
The US Democratic primaries delivered a surprise initial result, with Pete Buttigieg claiming victory in Iowa, only a hair ahead of Bernie Sanders, while Joe Biden came in fourth. Given no clear winner, this was a neutral result for markets, but a clear blow for former Vice President Biden. This result presents an opportunity for Michael Bloomberg to replace Biden as the moderate contender for the Democratic ticket. US payrolls came in much stronger than expected last week, albeit caveated by a slight uptick in unemployment and a boost from unseasonably warm weather. At the same time, US manufacturing sector surveys have rebounded, triggering a rally in US equities as relieved investors found renewed grounds for optimism. We favour quality cyclicals.
After a steady 15-month decline, upwards earnings revisions for January ticked up in the US and held steady in Europe. US company forward guidance is also on an improving trend, while overall, indicators point to the avoidance of an earnings recession in 2020. Given Q4 results so far, as long as margins hold up, we remain comfortable with our current positioning. Markets clearly agree, with new highs reached by both the S&P 500 and STOXX Europe 600. However, given high valuations and remaining global uncertainties, we keep put options in our portfolios for protection.