Investment thesis: the major international markets are still correction. While some may be forming bottoms, it’s still way too early to think about taking a position in any region.
On Monday, the OECD lowered its global growth estimatedue to the coronavirus (emphasis added):
On the assumption that the epidemic peaks in China in the first quarter of 2020 and outbreaks in other countries prove mild and contained, global growth could be lowered by around ½ percentage point this year relative to that expected in the November 2019 Economic Outlook.
A longer lasting and more intensive coronavirus outbreak, spreading widely throughout the Asia-Pacific region, Europe and North America, would weaken prospects considerably. In this event, global growth could drop to 1½ per cent in 2020, half the rate projected prior to the virus outbreak.
Here’s a graphic of the OECD’s projections:Obviously, these are estimates. But the point is taken: growth will take a hit.
The latest manufacturing PMIs from Markit are mixed.
- China’s PMI dropped from 51.1-40. However, don’t be surprised to see that number boomerang over the coming months as China restarts its economy.
- Japan’s PMI dropped from 48.8-47.8. New orders, production, and employment all decreased.
- Taiwan’s PMI dropped from 51.8-49.9, entering contraction territory. New orders, production, and employment all declined.
- Indonesia’s PMI rose to 51.9, but only due to the strength of domestic orders. Export orders declined.
- South Korea’s PMI fell from 49.8-48.7, with production and export orders declining.
- The EU’s manufacturing sector is still contracting; it rose from 47.9 to 49.2 but is still below 50.
- The UK continues to get a post-Johnson victory boost; its PMI is 51.7 thanks to a rise in domestic orders.
Most of this data is pre-coronavirus.
The service data was mixed.
- China’s service PMI dropped from 51.8-26.2, with new orders, production, and employment all dropping. As with the manufacturing data, don’t be surprised to see this number significantly reverse course over the next few months.
- Japan’s service PMI dropped from 51-46.8, largely due to a drop in new orders
- The EU service sector continued to expand; the service PMI increased .1 to 52.6. New domestic orders and employment continued to increase.
The RBA lowered Australian rates 25 basis points to 50 BP. Here are the key paragraphs from their release:
The coronavirus has clouded the near-term outlook for the global economy and means that global growth in the first half of 2020 will be lower than earlier expected. Prior to the outbreak, there were signs that the slowdown in the global economy that started in 2018 was coming to an end. It is too early to tell how persistent the effects of the coronavirus will be and at what point the global economy will return to an improving path. Policy measures have been announced in several countries, including China, which will help support growth. Inflation remains low almost everywhere and unemployment rates are at multi-decade lows in many countries. ….
The coronavirus outbreak overseas is having a significant effect on the Australian economy at present, particularly in the education and travel sectors. The uncertainty that it is creating is also likely to affect domestic spending. As a result, GDP growth in the March quarter is likely to be noticeably weaker than earlier expected. Given the evolving situation, it is difficult to predict how large and long-lasting the effect will be. Once the coronavirus is contained, the Australian economy is expected to return to an improving trend. This outlook is supported by the low level of interest rates, high levels of spending on infrastructure, the lower exchange rate, a positive outlook for the resources sector and expected recoveries in residential construction and household consumption. The Australian Government has also indicated that it will assist areas of the economy most affected by the coronavirus.
The bank’s statements and predictions are in line with what other central banks and international organizations are saying: the domestic economy will take a short-term hit, the length of the hit is unknown, but the expectation is that the economic trajectory will return to growth after an indeterminate period of time.
The Bank of Canada lowered rates 50 basis points to 1.25%. Here are the key points from the policy announcement (emphasis added):
Before the outbreak, the global economy was showing signs of stabilizing, as the Bank had projected in its January Monetary Policy Report (MPR). However, COVID-19 represents a significant health threat to people in a growing number of countries. In consequence, business activity in some regions has fallen sharply and supply chains have been disrupted. This has pulled down commodity prices and the Canadian dollar has depreciated. …
It is becoming clear that the first quarter of 2020 will be weaker than the Bank had expected. The drop in Canada’s terms of trade, if sustained, will weigh on income growth. Meanwhile, business investment does not appear to be recovering as was expected following positive trade policy developments. In addition, rail line blockades, strikes by Ontario teachers, and winter storms in some regions are dampening economic activity in the first quarter.
These observations are hardly shocking.
Let’s turn to this week’s performance table:
With the exception of the SPY, all international markets were off; it’s only a matter of degree. Starting at the bottom, Brazil, Russia, and India were some of the biggest losers, as was the entire Latin American region. Australia – which is dependent on China – also dropped as did Canada, which is more export-dependent. Other markets were actually a bit better off than you’d think given this week’s headlines.The charts are all still bearish. Some are trying to form bottoms while others are still moving lower. No region stands out, however, as a place to make a new trade just yet.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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