Positive investor sentiment took a hit in January due to rising fears of the Corona-Virus and tensions in the Middle East. Overall, more than 17,000 people have been reported infected and 360 killed so far. A total of over 100 infected persons have been reported outside China, but none in Switzerland. The figures reported so far are still relatively low in contrast to earlier viral infections. The swine flu that broke out in 2009, for example, caused over 575 thousand deaths, and the recent outbreak of Ebola in Africa in 2014 caused over 11 thousand deaths. Other infections such as MERS, SARS or avian flu have been contained with fewer than a thousand official casualties. The risk of spreading in Europe is currently estimated to be low, also because China seems to react very quickly and effectively compared to the SARS pandemic. The impact on the markets was minimal in all historical cases or was overshadowed by other events (Iraq war 2003 in the case of SARS, FED policy 2009 in the case of swine flu). If the corona virus is contained, growth will probably only be temporarily impaired. However, we expect Chinese growth to be more severely impacted by the real economy in the coming months, which should also have a correspondingly negative impact on investor sentiment. The expansionary fiscal and monetary policy worldwide and the rapid earnings reports to date continue to support risk investments.
Under the influence of the corona virus, the Chinese markets and the Hang-Seng Index in Hong Kong in particular suffered heavy losses. Since January 24, the Chinese stock exchanges have been closed for the Chinese New Year - and a two-day extension due to the virus outbreak. The other world markets ended the month flattish. The Swiss stock market (SMI) is approaching the 11,000 mark and the S&P500 Index exceeded the 3,300 mark for the first time, albeit only temporarily. The vast majority of companies in the USA and Europe have so far exceeded profit and sales expectations. However, the reporting season is still in its infancy, but the trend of positive surprises should continue. Valuations on the equity markets are thus reaching new multi-year highs. Based on estimated earnings, the S&P500 is as expensive as it was last in 2002, but interest rates at the long end (10 years) are also more than 2% lower than in 2002 (see FOCUS).
Since January 2020, yields have again fallen significantly worldwide. The uncertainty caused by the corona virus has additionally driven investors into safe investments. The US 10-year Treasury is still yielding 1.5% at maturity - only about 5 basis points above the previous year's low. The Swiss Confederation (10Y) also rose significantly. The yield to maturity again fell more sharply into negative territory (-0.7%). The yield curves have thus also flattened out again since the start of the year. The ECB's interest rate decision came as no surprise. The key interest rate remains at 0% and the ECB is buying monthly bonds worth EUR 20 billion. The new ECB President Christine Lagarde has also initiated a revision of the monetary policy strategy. However, the results are not expected to be published until the end of the year. However, we are still away from the inversion of the yield curves seen at the end of August 2019 and we expect the economic outlook to normalise if it remains positive. The US Federal Reserve is increasingly dissatisfied with low inflation. This has again been interpreted "dovish" by the markets and at least one interest rate cut is expected by the FED this year.
Oil was unable to maintain the geopolitically induced interim profits and lost more than 15% in January due to demand fears in connection with the virus outbreak. Gold was more stable in this respect, closing 4.7% higher despite the easing of tensions and a strong USD (trade-weighted USD index +1%). The currencies of commodity-dependent nations such as the Norwegian Krone and the Australian dollar were particularly hard hit by the weak oil price and the stronger USD, which affected commodity prices overall.
The reporting season will be the focus of investor interest until February, but also the further course of the virus. The global equity market is not yet showing any divergences that would indicate a trend reversal, so the outlook for equities remains positive. The sharp fall in interest rates currently fits least well into our scenario of growth recovery but at the same time puts the high absolute valuations into perspective, which is partly due to the expansive monetary policy of the central banks. We continue to believe that the monetary and fiscal policy measures should lead to a further improvement in economic data. If contained, the virus outbreak is likely to cause only a temporary dent in growth.