From trade war to corona virus

2020 started with a strong stock market upturn, driven by positive macro and increases in earnings estimates. Towards the end of the month, the corona virus led to a sudden change in mood.

The American S&P 500 Index ended January unchanged measured in USD, while the European Stoxx 600 Index fell by 1.6 per cent measured in EUR and the Nordic VINX Index climbed 3.7 per cent measured in NOK (lifted by a marked weakening of the NOK). Here in Norway, the Oslo Stock Exchange (OSEBX) dropped by 1.9 per cent.

The Wuhan virus

January started promisingly, with amongst other the signing of the phase 1 agreement in the trade war between the USA and China on 15 January. Only a few days later, the Chinese authorities reported the outbreak of a new corona virus, the Wuhan virus. This is naturally serious for all those affected, but it also affects the growth in the Chinese economy. If the virus increasingly spreads to more countries, global growth will also be affected to a greater extent. Experience of SARS, Ebola, swine influenza and other epidemics has however shown that the negative effect on the economy is short-lived.

Postponed, but not called off

One explanation of the short-lived effect is that there is usually a postponement or time-lag in economic activity while waiting for a virus to stop spreading. Trips that have been postponed, overnight stays and the purchase of goods are usually carried out once the situation is normalised. Most analysts have now reduced their first-quarter growth estimates for China, but at the same time increased their second-quarter estimates. So far, the growth prospects for the whole of 2020 are relatively unchanged.

Macro on the upside

Before the new corona virus spread, global macro figures had been an upside surprise. We saw this in the G7's consensus GDP forecasts for 2020 too. The improvement in and stabilisation of global industrial figures and manufacturing barometers helped. Developments in the trade war and Brexit have also removed uncertainty and, together with the effects of the expansionary monetary policy, have helped to raise expectations.

The road ahead …

In the short term, we must expect increased fluctuations as a result of the Wuhan virus. Long-term investors must, as usual, look past the unrest and noise. The stock market remains the best alternative.

"Fears and lies intensify consciousness"
Mason Cooley