Equities still hold potential despite virus fears

While the coronavirus is causing uncertainty and falling prices in the financial markets at the moment, we still expect a decent return from equities in the coming year.

Fears about the negative economic impact of the coronavirus sent global equity markets into a tailspin last week, with prices plunging more than 10%. Nevertheless, Danske Bank’s chief strategist, Henrik Drusebjerg, expects the negative effects will be temporary.

“Until the coronavirus erupted across our news screens, the economy was showing signs of stabilisation after a period of weak indicators and outright recession fears in 2019. And while the virus will doubtless hit growth for a time, we expect a pronounced recovery in activity and a further stabilisation of the economy once we get through the crisis. We are expecting a decent return from equities over the coming 12 months, though further market volatility is on the cards in the shorter term,” he says.

These are some of the main conclusions in Danske Bank’s new quarterly report, Quarterly House View. In the report, Danske Bank’s strategists focus on developments in the global economy, current investment opportunities and the risks and expected return from equities in 2020.

Positive factors for the economy

Among the positive factors for the global economy, Henrik Drusebjerg mentions declining fears of an escalation in the trade war between the US and China, which previously weighed heavily on business sentiment. In addition, robust labour markets, rising wages and low interest rates are helping to ensure solid private consumption, though the coronavirus could cause some consumers to stay at home and so curtail spending for a while.

“Other important factors are limited inflation and moderate economic growth. These factors continue to provide central banks with the leeway to support the economy through accommodative monetary policy – i.e. low interest rates and bond purchases – without fear of the economy overheating or runaway inflation,” explains Henrik Drusebjerg.

Need for economic stimulation

The recent spread of the virus to other parts of the world has increased the risk that we will experience a longer period of slowing economic growth than previously assumed. According to the chief strategist, this will increase the need for the authorities, including the central banks, to do their bit to stimulate the economy in the meantime.

“We have already seen the authorities take action in China, while the US central bank announced on Friday it would act to support the economy via monetary policy easing,” says Henrik Drusebjerg.

Maintaining our overweight in equities

Despite the current market turmoil, we at Danske Bank are maintaining a slight overweight in equities – in other words, we continue to have slightly more equities in our portfolios than we expect to have in the long term, and likewise fewer bonds. Part of the overall picture is also that bonds still offer very modest expected returns due to the low level of interest rates.

“We generally continue to assess equities as the best alternative for investors in the current low interest rate environment. Hence, despite the current turbulence we still expect to see a solid underlying demand for equities once the worst turmoil has eased,” says Henrik Drusebjerg.

Nevertheless, recent developments in the financial markets have underlined the value of having bonds in a portfolio. While equity prices have been falling, investors have sought a safe haven in the most secure bonds, such as Danish, German and US government bonds, which have risen in price and thus contributed to reducing losses in a mixed portfolio of investments.

Read Quarterly House View here.

Key risks we are monitoring

POLITICAL RISK COULD FLARE UP AGAIN: Despite the phase 1 trade agreement between the US and China, there is still a long way to go to reach a more comprehensive trade deal, just as a hard Brexit remains a real possibility when the current transition period expires.

CORONAVIRUS OUTBREAK MAY BE PROLONGED: Should the negative effects of the virus prove greater or more long-lasting than expected, the stabilisation of the global economy could be threatened.

DISAPPOINTING ECONOMIC DATA: The coronavirus outbreak may result in a period of disappointing economic data that increases investor concerns about whether the stabilisation of the economy is on the right track.

Danske Bank has prepared this material for information purposes only, and it does not constitute investment advice. Always speak to an advisor if you are considering making an investment based on this material to establish whether a particular investment suits your investment profile, including your risk appetite, investment horizon and ability to absorb a loss.

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