Overview
The market maintained its pessimistic outlook in February as Covid-19 became the central focus amongst global investors. This month, global equities have tumbled over growing fears of the Covid-19 spreading outside of China. These fears have been validated by the confirmation of over 89000 cases and 3000 deaths, 4 times as many as the SARS outbreak in 2003. Recent developments have shown that the Covid-19 is no longer just a China-only issue, with the number of new cases surging every day across more than 50 countries in APAC, Europe, USA and even the Middle East and Africa. Investor confidence has taken a dive as it awaits to be seen how global governments attempt to contain the spread.
Equity Markets
The final week of February was disastrous for global equities as fears over Covid-19 turned investors towards safer alternatives. US equities experienced the biggest drawdown since the 2008 Financial Crisis, with both the S&P 500 and Dow Jones declining more than 12%. Closer to home, the Straits Times Index (STI) also declined around 6%. The sell-off was fueled by concerns that covid-19 would put a pause on corporate profits and economic growth. Aside from travel and tourism companies, the tech, apparel and industrial manufacturing sectors were also hit hard due to their reliance on supply-chain inputs from China and South-East Asia. Even industry leaders Apple (AAPL) and Microsoft (MSFT) experienced significant drawdowns and have warned investors that they are likely to miss February sales projections due to supply-chain disruption.
Fixed income
The accelerating Coronavirus spread has raised concerns about global economic growth and has sent investors scrambling to the safety of US Treasury bonds. Surging demand has driven yields on the 10 year United States Treasury Bond down to a historical low of 1.12% - down from 2.7% a year ago. Initial fears of the Coronavirus has push rates below the levels of the global financial crisis, with concerns that Central Banks will find themselves short of ammunition if there were to be a real, tangible disturbance to the economy. While investors are expecting the US Federal Reserve to cut interest rates to around 1%, in an economy that is doing quite well, it may leave little room for further monetary stimulus if conditions worsen.
Hedge Funds
Despite a decade of mostly underwhelming returns compared to major equity indices, hedge funds appear to be tiding through the toughest market conditions since the Global Financial Crisis – some even made money. Estimates show that fundamental equity hedge funds were either narrowly in the green or down several basis points, a stellar performance considering the 12.6% decline in the S&P 500. According to Bloomberg, large firms such as Millennium Management and Point72 Asset Management significantly outperformed the market with gains of less than 1% this month. It remains to be seen how hedge funds continue to perform in the protracted economic slowdown as the Coronavirus situations pans out. For more information about our recommendation on investing in global markets amidst the virus outbreak, feel free to contact us.
Volatility Index (VIX)
While equity markets have plunged over fears of the Coronvirus spread, one market indicator is taking off: VIX. The CBOE volatility index came down from maintained at a level around 15 – 17 in early February before soaring to a 49.5 in a span of 3 days – the highest its been since 2011. Investors rely on VIX to assess the level of risk and fear in the stock market. While some analysts view the high volatility levels as a green light to enter the market, others are hesitant that this shock is just the beginning and that markets will face greater challenges in the near future.
Commodities Markets
The prices of prices Brent Crude and West Texas Intermediate showed signs of recovering in the first half of February due to early signs of slowing spread of Coronavirus within China and neighboring countries slowing. However, new Coronavirus developments across every continent except Antarctica in the last week of February sparked fear amongst investors which sent prices tumbling more than 15% from its month high to a 13-month low. Oil industry analysts fear that further spread of the virus will lead to city-wide and regional lock downs, with reduced transportation and factory operation, all of which is bad for oil prices.
Gold increased in popularity as a safe haven as prices rode on its January growth to a 7-year high in the third week of February, coming close to breaking 1700 USD/Oz. However, prices also came down in the last week of February along with equity markets as investors sold their Gold holdings to generate liquidity.
Other news
HSBC announced that it will cut around 35000 jobs as part of its plan to cut costs following its announcement of a net profit decline of more than a third. Interim Chief Executive, Noel Quinn, said the bank aims to reduce costs by $4.5bn (£3.5bn) by 2022, which would mainly come in the form of scaling back its 235,000 strong workforce. The bank’s cuts will focus on its European and US investment banking operations.
JPMorgan Chase CEO, Jamie Dimon, announced that the bank is hunting of its next big acquisition at its annual investor meeting last Tuesday. Mergers in the fintech space have began to ramp up as established firms are facing pressure to grow and expand their services. Morgan Stanley has also recently revealed plans to buy discount broker E-trade for $13 billion. Dimon added that the acquisition could be anywhere in the financial services and technology sector, following its last 2 acquisitions of payment firms InstaMed and WePay.