The COVID-19 outbreak remains the elephant in the room for the Japanese economy. With hundreds of locally transmitted cases in the Island by the end of the month, the Olympic Games at the edge of cancellation, many are concerned that the outbreak could send the country into recession.

As the latest economic figures remained relatively weak, especially with the recent epidemic woes, PMI stayed in the contraction zone along with plunging business confidence. Even though the fiscal stimulation has yet to play out as it was scheduled for 2020 Q2, and the monetary support to the markets via asset purchases should continue to provide downside protection, the Japanese economy lacks a catalyst to further advance amidst weak market sentiment.

Due to the virus outbreak in China earlier, Japan is bound to miss the tourist target of 20 million, and the precarious situation of the Tokyo Olympics does not provide much reassurance in the economy. Considering that the ‘black swan’ event of COVID-19 is set to have a material impact on the Japanese economy outlook, we downgraded the outlook for the Japanese equity performance in 2020 from positive to neutral.

As a result, the European STOXX 600 was down by 8.54% (9.21% in US$ terms) in February.

While Brexit matters were overshadowed by the COVID-19 outbreak, EU officials are set to approve the trade talk mandate after the official leave of the UK from the single bloc. EU leaders including Irish foreign minister Simon Coveney urged the UK to start implementing new border rules within months as a matter of good faith, so as to better progress the much needed trade talks before the deadline at the end of 2020.

As for the COVID-19 outbreak, confirmed cases in Europe skyrocketed with the thousands of newly confirmed cases in Italy. Fear in the markets increased, many are also concerned about a supply shock due to the impact of the virus in China. Combining that with the falling global demand and China in particular, the impact on earnings has still yet to be fully realised in European equities.

Fundamentals continued to show improvement. Although Eurozone manufacturing PMI continued to improve, it remained in the contraction zone for thirteen consecutive months, while the Euro Area Economic Sentiment Indicator surprisingly rose to 103.5 in February despite the ongoing COVID-19 outbreak. Overall, we remain less optimistic on the European equity outlook, as fundamentals remain weaker and the actual impacts of the COVID-19 on the European economy have yet to be fully realised.

In February, the CSI 300 Index and the Shanghai Composite Index fell modestly by 1.59% (2.80% in US$ terms) and 3.23% (4.41% in US$ terms) respectively, while the Hang Seng Index also only went down by 0.69% (1.06% in US$ terms).

Chinese official figures showed significant slowdown in new COVID-19 cases at the end of February, which hinted that the epidemic might have peaked earlier in the month. Subsequently, most of the provinces in China have announced gradual resumption of the economic activities, sparking hope that the worst has already been over in China.

That said, economic indicators hinted at the impacts of the virus on the real economy. Business activities were heavily hit with city lockdowns, as indicated by the huge drop in both service and manufacturing PMI to historic lows. The worsening business and consumer confidence could have long lasting effects, potentially dragging down economic growth in 2020. At the moment, we expect monetary policy to further loosen so as to support businesses, and fiscal policies, in particular infrastructure investment, to be enacted at the same time to kick start the economy. Overall, the short to mid-term economic outlook remains relatively volatile in China but seems to be turning for the better.

Equity gains ebbed out amidst COVID-19 worries. With a number of manufacturers including Apple Inc. (NASDAQ: AAPL) already warning investors about a potential supply chain shock due to logistic constraints, many are concerned that the actual impacts of the virus could be wider than markets reflect.

In light of the potential global outbreak, the Fed responded to market expectations, announcing an unexpected emergency rate cut of 0.5%. This is the first time the emergency rate cut is utilised since the financial crisis in 2008, triggered a rise in market panic levels and markets responded negatively to the cut.

Various economic indicators remain relatively weaker, with both manufacturing PMI and consumer confidence index missing market expectations. Despite limited positive signs, monetary easing provides sufficient excess liquidity to support asset prices, which offers better downside protection for the US market.

Overall, the recent fall in equities is driven mainly by worsening market sentiment, rather than worsening fundamentals. Equities are expected to see recovery when market sentiment recovers. Thus, we remain positive on US equity performance over the whole year.

United States

The global spread of the COVID-19 epidemic has not subsided, the number of cases globally has risen sharply and exceeded 230,000, and the number of deaths globally has also broken the 10,000 mark. Europe became an epicentre of the COVID-19 epidemic, virus deaths in Italy alone surpassed Chinese figures. However, the selloff in US stocks has shown signs of easing. Over the past 5 days ending Thursday, the Dow fell 5.25%; the S&P 500 lost 2.87%; while the NASDAQ has the smallest drop of only 0.71%. US equity markets recorded the worst one-day percentage drop since 1987 on Monday, and triggered the ‘Circuit Breaker’ several times in recent weeks. Apart from stock markets falling, it was surprising that other assets classes also experienced significant selloffs, this includes traditional safe haven assets such as investment grade bonds and gold. The common consensus on the cause of the prolonged market fall was mainly driven by large-scale deleveraging factors, resulting in virtually all financial assets being sold in the market for cash. Therefore, the US dollar index which reflects the strength of the Dollar has also risen sharply. In terms of international oil prices, after Saudi Arabia insisted on increasing crude oil production, WTI Crude briefly touched the level of US$ 20.06 per barrel, before rebounding to around $26.6/barrel at the time of writing. At the moment, the fed funds rate is down to 0.00 - 0.25 %, and President Trump has signed the second epidemic relief bill of US$ 1.2 trillion, the market is still evaluating the effectiveness of the latest rescue measures.

Europe

The number of new cases of COVID-19 in the world has increased sharply, and Italy has become the epicentre of the ongoing epidemic, Prime Minister Conte will announce the extension of the national lockdown and school suspension. Britain however has rejected plans to lockdown London, and Prime Minister Johnson claimed that the government can get the situation under control within 12 weeks. In order to combat the impact of the virus epidemic on people’s livelihood and the economy, the European Central Bank announced an asset purchase plan of 750 billion euros; the Bank of England also cut interest rates by 0.15% to 0.1%, and extended the scale of the bond purchase program by 200 billion Pounds. Over the past 5 days ending Thursday, the UK, French and German indexes fell 1.64% to 6.01%.

China

The COVID-19 epidemic brought challenges to the Chinese economy, and the country’s industrial production, retail sales, and fixed investment growth figures have all seen sharp falls in February. However, the epidemic seems to be fading out in China. This week, the country reported zero locally transmitted cases, the first time since the outbreak. Over the week, the CSI 300 and the Hang Seng Index fell 6.21% and 5.11% respectively. China announced today that its one-year and five-year LPRs will not be adjusted, while the market had originally expected them to be reduced by 5 basis points each. At the moment, market expects that The two sessions will be postponed until late April or early May. Industrial profits data will be published next week.

• Recent activities include : Harris Fraser held a Press Conference on “2020 Global Investment Market Outlook”, Attended Bloomberg Businessweek/Chinese Edition Top Fund Awards 2019
• Columns, media interview and online channels : “TVB News”,“TVB Big Big VIP”, “Now FINTERVIEW”, “iCable Finance”, “iCable News”, “Capital”, “SingTao Newspaper”, “Sing Tao Investment Weekly”, “Headlines News” , “ET Net”, “OrangeNews”, “Quamnet” and online videos produced by Harris Fraser Group. (including but not limited to the above)

United States

US equities continued the trend of abnormally high volatility. Just as the markets analysed the implications of the surprising emergency 0.50% rate cut from Fed, the breakdown in OPEC+ talks out of the blue triggered a dramatic fall in oil prices, falling by more than 24% over a single day. This triggered global market panic alongside the ever growing issue of COVID-19 outbreak. President Trump held a press conferences to explain the current White House plan for the financial market and economy as a whole, the Fed also announced to inject $1.5T in liquidity to prevent the investment market from drying up. However, markets remained unimpressed. US equities in particular suffered huge losses over the past 5 days ending Thursday, triggering the Circuit Breaker twice over the short timeframe, major equity indexes shed a whopping 15.59-18.84% over the period, Thursday saw one of the largest single day percentage drops since the 1987 stock crash on Thursday. All 3 major US equity indexes entered the technical bear market. The economic data this week still met expectations, earnings forecast remain largely unchanged. Despite fundamentals remaining stable, under impression that the COVID-19 epidemic is bound to happen in the US, market sentiment further deteriorated and valuations fell to minus 2-3 standard deviations from the 5 year average. Next week, retail sales, housing starts and home sales data will be released. The FOMC meeting will also be held during the week, market is currently pricing at least a 0.75% cut to Fed rates.

Europe

Over the past 5 days ending Thursday, the European stock market had one of the worst performances in history. The UK FTSE, French CAC, and German DAX fell 21.89%, 24.56, and 23.30% respectively, while the Italian MIB fell a whopping 30.90%. The oil shock joined hands with the COVID-19 outbreak, causing great fear in the market, the forward P/E of the European STOXX 600 Index even fell to over minus 4 standard deviations from the 5 year average. The COVID-19 outbreak in Europe remains the elephant in the room, with newly confirmed cases showing no signs of slowing down. The WHO finally declared the COVID-19 crisis a pandemic, the epicenter of the outbreak, Italy, has taken drastic measures and put the whole country under lockdown, many fellow European countries banned public events and gatherings for the time being in order to curb the virus spread. In an unexpected manner, the ECB did not follow the Fed and announced no changes to the existing interest rate. Even though the quantitative easing in form of an additional EUR 120 billion Asset Purchase Plan (APP) should continue to provide support to the market, markets reacted poorly and market sentiment remained on the lower end. Next week, Eurozone CPI figures and ZEWS Survey Expectations will be released next week. Market expects CPI to stay flat while the ZEWS expectations should fall into deep negative territory.

China

Compared to the global stock market, the China and Hong Kong stock markets have experienced relatively smaller declines this week. The CSI 300 only fell 4.53%, while the Hang Seng Index dropped 7.03%. Just as the World Health Organization confirmed the COVID-19 as a pandemic, there was greater market panic in the markets outside China and Hong Kong, resulting in greater selling pressure in overseas stock markets. As for China, recent news indicated that the central government may soon reduce the RRR and announce consumption incentive plans and other stimulation measures, the news provided support to the market. Economic data showed that China’s annual inflation rate slightly slowed to 5.2%. At the same time, new RMB loans in February also fell sharply, reflecting the impact of the epidemic on the real economy. Next week, China will release February fixed investment, industrial production and retail sales data, as well as the Loan Prime Rate (LPR).

• Recent activities include : Harris Fraser held a Press Conference on “2020 Global Investment Market Outlook”, Attended Bloomberg Businessweek/Chinese Edition Top Fund Awards 2019
• Columns, media interview and online channels : “TVB News”,“TVB Big Big VIP”, “Now FINTERVIEW”, “iCable Finance”, “iCable News”, “Capital”, “SingTao Newspaper”, “Sing Tao Investment Weekly”, “Headlines News” , “ET Net”, “OrangeNews”, “Quamnet” and online videos produced by Harris Fraser Group. (including but not limited to the above)

United States 

COVID-19 cases across the globe further increased over the week, with situations in South Korea, Japan, Italy, and Iran significantly worsening. In particular, South Korea reported more than 500 new cases on Friday, bringing the total confirmed cases up to 2,337, the largest number of cases outside China. Back in the US, the CDC reported a possible case of ‘community spread’ of the virus in home soil, spreading fear in the market throughout the week. Over the past 5 days ending Thursday, S&P 500, Dow Jones, and NASDAQ fell 11.69%, 11.82%, and 12.15% respectively, which was the worst 5-day-rolling-return since the Financial Crisis back in 2008. Economic data released this week were mixed. The important consumer confidence index came in at 130.7, missing market expectations of 132.0, but still managed to record a slight increase over the January figure. The final 2019 Q4 GDP came in line with expectations, and durable goods were better than expected. Overall, we have yet to see the actual impact of the virus on the real economy and the extent of supply chain disruption. In light of the uncertainty, investors could pay more attention to upcoming data hinting at the virus impacts. Next week, various PMI data, non-farm payrolls, unemployment, and hourly earnings data will be released.

Europe

The COVID-19 epidemic spread like wildfire across the globe, confirmed cases in Italy and Iran skyrocketed over the week, triggering panic selling in the market. The UK FTSE, French CAC, and German DAX fell 8.21%, 8.86%, and 8.92% over the past 5 days ending Thursday. However, ECB president Lagarde downplayed the economic impact of the COVID-19 epidemic, claiming that the long term impacts on the economy are yet to be seen. That said, confirmed cases in Italy has exceeded 600, neighboring countries of France and Germany warned their citizens of the potential outbreak, given the close ties between EU members. Economic data showed surprisingly strong numbers from the German IFO Business Climate Index and the Eurozone business and consumer survey, both topping market expectations despite the looming COVID-19 outbreak on the continent.  Next week, more data on various PMIs, CPIs and retail sales will be released.

China

Risk off due to the global spread of COVID-19 epidemic eventually affected market sentiment in the China and Hong Kong stock markets. Over the week, the CSI 300 Index and the HSI fell 5.05% and 4.32% respectively. As the COVID-19 outbreak initially started in the region, the Chinese and Hong Kong stock markets fell first. Thus, during this downturn, the respective markets suffered less loss than global markets. However, the Shanghai Composite Index still fell below the 100-day and 200-day-moving-average this week. During the week, the net sell via Stock Connect set a record high, and the combined stock market turnover has exceeded one trillion yuan for eight consecutive trading days, matching the previous record in 2015. As China has started to resume economic activities, whether there will be any further large scale outbreak could be answered over the next two weeks, investors could closely monitor the relevant data in the weeks to come. As for Hong Kong stocks, as it is expected that the Chinese government will increase infrastructure spending to stimulate the economy, capital inflow to relevant sectors can be worth noting.

• Recent activities include : Harris Fraser held a Press Conference on “2020 Global Investment Market Outlook”, Attended Bloomberg Businessweek/Chinese Edition Top Fund Awards 2019
• Columns, media interview and online channels : “TVB News”,“TVB Big Big VIP”, “Now FINTERVIEW”, “iCable Finance”,“iCable News”, “Capital”, “SingTao Newspaper”, “Sing Tao Investment Weekly”, “Headlines News” , “ET Net”, “OrangeNews”, “Quamnet” and online videos produced by Harris Fraser Group. (including but not limited to the above)

The biggest concern at the moment is the extent of damage caused by the COVID-19 outbreak, as the Japanese economy is relatively exposed to China, markets are concerned if the economy will take a hard blow as Chinese consumption falls, threatening economy revitalisation plans in Japan. With confirmed locally transmitted cases reported in Japan mainland, the outbreak also clouds Olympic prospects, as a more widespread impact could dissuade visitors, or even cause the event to be cancelled in extreme circumstances, potentially damaging the Japanese economy.

Yet, we stay positive on the economic outlook of Japan in 2020. Although the latest economic figures continue to show slight weakness, in particular soft PMI figures, which might be compounded with the ongoing virus outbreak. Yet, the key fiscal stimulation plan of Prime Minister Shinzo Abe should still provide much support to the Japanese economy, supporting the equity markets performance.

In line with our 2020 outlook on emerging markets, external shocks remained the key factor in EM performance. While trade barriers have decreased, the COVID-19 epidemic would likely dampen Chinese economic growth, reducing global demand, which might have a ripple effect on the global economy in 2020. EM economies which are often highly exposed to external markets might find rebounding the economy difficult in the short to mid-term.

As external risks mount, we would advise to take caution before investing in EM equities, although it is expected that EM economies should outgrow DM economies in 2020, the extent of damage caused by the epidemic would still require further investigation. Thus, we remain neutral on EM in the short to mid-term.

United States 

The spread of the COVID-19 epidemic accelerated in Japan and South Korea, while the China National Health Commission announced that as at 20 February, there are 75,400 confirmed cases in China. Market sentiment remained weak due to virus woes, and overall global markets underperformed. Over the past 5 days ending Thursday, the S&P 500 and the Dow fell 0.18% and 1.12% respectively. However, the NASDAQ rose by 0.26%. The January FOMC meeting minutes were released this week, showing that the economy was stronger than expected at the end of January, most officials see the current interest rate policy as appropriate for "quite a period of time." However, opposing views still existed within the committee, and Fed Vice Chairman Clarida emphasised that most economists do not expect rate cuts any time soon. According to the Bloomberg interest rate futures data, market predicts that the Fed will cut interest rates at least once before the end of the year. Next week, the United States will release the revised GDP figures for 2019 Q4, the market expects that the annualised increase will be revised slightly upwards from 2.1% to 2.2%. In addition, the United States will also announce the finalized figures of the January Core PCE, the February Consumer Confidence figures, and the University of Michigan Consumer Sentiment Index in February.

Europe

European equity performance was unsatisfactory over the week, with the UK FTSE, French CAC, and German DAX falling 0.22%, 0.51%, and 0.59% over the past 5 days ending Thursday. The Vice President of the European Central Bank (ECB) Guindos affirmed that the Eurozone economy is growing moderately, but mentioned that sluggish trade and the COVID-19 epidemic will lead to increased uncertainty in the economic outlook. As for economic data, the February Eurozone ZEW Economic Sentiment fell from 25.6 to 10.4, while the Eurozone Consumer Confidence Index came in at negative 6.6, which improved over the previous value of negative 8.1 and beat market expectations of negative 8.2. The Eurozone will announce the final figures of the February consumer confidence index and the February CPI next week. The market expects the YoY increase in CPI to fall from 1.4% to 1.2%. If inflation data continues to weaken, it may further solidify market expectations for the ECB maintaining a dovish stance.

China

China and Hong Kong stock markets had mixed results this week. A-shares continued the rebound with large trading volumes. The Shanghai Composite Index reclaimed the 3,000 level, closing at 3,039 on Friday, up 4.2% over the week. The Hong Kong Hang Seng Index met resistance at the 28,000 level and subsequently fell, closing at 27,308 on Friday. Under the influence of the epidemic, the local economy remains under pressure, it was speculated that the Chinese government may increase market liquidity to support the A-shares. This week, the People's Bank of China and the Ministry of Finance increased their efforts to strengthen monetary and fiscal policy amidst the COVID-19 epidemic. In particular, the central bank cut MLF and LPR interest rates respectively. A-share market sentiment remains positive.

• Recent activities include : Harris Fraser held a Press Conference on “2020 Global Investment Market Outlook”, Attended Bloomberg Businessweek/Chinese Edition Top Fund Awards 2019
• Columns, media interview and online channels : “TVB News”,“TVB Big Big VIP”, “Now FINTERVIEW”, “iCable Finance”,“iCable News”, “Capital”, “SingTao Newspaper”, “Sing Tao Investment Weekly”, “Headlines News” , “ET Net”,“OrangeNews”, “Quamnet” and online videos produced by Harris Fraser Group. (including but not limited to the above)