Why the Coronavirus Isn’t a Buy-the-Dip Opportunity Yet
The steep sell-off in stocks related to the coronavirus has intensified focus on the financial implications of the outbreak. Much of the narrative, especially when it comes to economists and market pundits as opposed to companies, has yet to internalize the significant uncertainties concerning both the known knowns and the known unknowns.
As the virus has spread into several countries — particularly Iran, Italy and South Korea — and brought with it more sudden economic stops, it has become even harder for companies and economists to ignore the mounting damage to supply-and-demand conditions on the ground, let alone the funding challenges that lie ahead for some of the more financially stressed companies in China. With that, more companies have warned about the immediate outlook for their earnings, and several economists have revised downward their growth projections for the quarter, particularly when it comes to Asia. Meanwhile, doctors are busily collecting data, investigating, consulting and working on vaccines. Yet most seem to feel that they have yet to comfortably get their arms around some of the most important basic elements about this new virus such as transmission rates and incubation periods.
No wonder when I look at the year as a whole I find it hard to predict not only how and when demand will recover but also how well-functioning supply chains will be restored. I am also concerned about the financial outlook of highly leveraged companies and countries, as well as the big overhang of triple-B rated companies over the high-yield market.
Companies appear to have internalized these uncertainties better than economists and markets. All of that leads to me to continue to question the latter’s comforting notion of a rapid V-shaped recovery as opposed to a U-, W- or L-shaped one.
Some companies have suspended their 2020 earnings guidance altogether. By contrast, most economic growth revisions, including the latest from Goldman Sachs on Asia, are holding on to a sharp fall in the first quarter followed by a sharp rebound in the second and beyond. Consistent with this, the majority of market analysts are urging investors to buy the dip in the fear of missing out on yet another leg up in what has been a remarkable record-breaking market run.
Given both short- and longer-term uncertainties, the companies’ stance feels more solid than that of most economists and market pundits — and that’s before factoring in conditions that were far from favorable to begin with, such as a fragile global economy and asset prices that have been decoupled from underlying fundamentals.
Short-term questions include how the virus will be contained, the process for overcoming the damaging sudden economic stops and the extent to which stressed balance sheets will be supported by others. For markets, the chief question is whether the supply-and-demand shock emanating from China is big enough to shake the faith in central banks and change the deep FOMO/buy-the-dip conditioning.
The longer-term issues are even more complex. Will the shock to China derail what has been an unprecedented development process? What will happen to the China brand that was underpinning much of the country’s regional and international expansion and integration? Will the immediate disruption to travel and supply chains fuel a multiyear deglobalization?
The hope remains that the coronavirus will be contained quickly and that the cascading sudden economic stops can be reversed rapidly. Even before that happens for sure, the time will come to buy risk assets, focusing on market segments that have underperformed for a while. But there simply isn’t enough evidence at this stage to predict a timetable with any degree of confidence. After all, it is rare for a sudden stop to break out in some of the largest economies in the world. There is still much more unknown than known.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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