A Hot Emerging-Market Bond Strategy Comes Back on Coronavirus Fears

The emerging-market bond strategy that delivered a bumper return last year is regaining momentum as the new coronavirus spreads.

Going long duration in a bet the outbreak will slow global growth and convince central banks to ease policy has already returned more than 5% since the start of 2020, after surging 26% last year. Lombard Odier, Pictet Asset Management and Emso Asset Management all say they’ve revised their portfolios investing in developing-economy debt to boost duration, which measures a bond’s sensitivity to changes in interest rates.

“A situation like the coronavirus basically impacts global growth that is already quite fragile,” said Dhiraj Bajaj, a fund manager at Lombard Odier in Singapore, whose Asia debt team oversees $5 billion. “We increased duration last year as we felt global growth will slow. We increased again in January, given the virus situation and to protect our portfolios.”

Emerging-market bonds denominated in the dollar due in 10 years or more have returned 5.5% this year, according to a Bloomberg Barclays index that includes sovereign, quasi-sovereign and corporate debt. The index rallied from December 2018 through August last year as the U.S.-China trade dispute fueled concern global growth would slow, only for gains to ebb when the two sides reached a phase-one deal. The spread of the coronavirus has seen it gather pace again.

Lombard’s Bajaj recently bought the debt of quasi-sovereigns issuers in Thailand, Indonesia and India with maturities of 30 to 40 years. His main fund, the $2.8 billion Lombard Odier Asia Value Bond, has a duration position of 5.9 years, compared with 4.5 years for the benchmark it uses to gauge performance. The fund has outperformed 98% of its peers over the past year, according to data compiled by Bloomberg.

Policy Easing

The spread of the epidemic needs to be watched closely as it threatens the world economy, Federal Reserve Chairman Jerome Powell told U.S. lawmakers last week. The Thai and Philippine central banks both cut rates this month as the epidemic hammered Asian tourism, travel and business confidence, while policy makers in Malaysia and Singapore have also signaled a willingness to ease following the outbreak.

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Pictet has boosted its overweight duration position in developing-market bonds, partly on the view the coronavirus will convince central banks to become more accommodative.

“We like 30-year bonds, 40-year bonds and even in some selected cases, 100-year bonds,” said Guido Chamorro, co-head of emerging hard-currency debt in London at the company that oversaw $208 billion at the end of 2019.

Chamorro said his team has been building its overweight duration position since last year as the Fed pivoted to a dovish stance, and is focusing on investment-grade countries such as Peru, Panama, Mexico, Romania and Qatar.

Emso’s View

For Emso Asset, value lies in the 20- to 30-year bonds of BB and BBB rated sovereigns such as Indonesia, Paraguay and Peru, according to Jens Nystedt, a fund manager in New York, who helps manage $6 billion. Longer-maturity bonds in emerging markets offered the best value even before concern about the coronavirus surfaced because of their attractive spreads, he said.

And that means such trades will probably remain rewarding even if the coronavirus outbreak fades given the global growth outlook, according to Lombard’s Bajaj. There’s no reason for the Fed to raise rates and the two largest emerging Asian economies — China and India — are both slowing, he said.

“Even if the virus goes away, and we certainly hope it will, it will not meaningfully change the global picture for fixed-income investors,” Bajaj said.

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Tyro unveils $19m loss, revenue jump in first result since ASX debut

Payments disrupter Tyro has reported a 28.4 per cent lift in revenue and record growth in new clients but also a blow out in its statutory loss, as it booked its first half-year result as an ASX-listed company.

Following one of the most successful Australian floats of 2019, Tyro on Thursday announced first-half revenue of $117 million, with more than 6000 new merchants signing up to use the company's eftpos machines, which processed $11.1 billion in transactions, over the six-month period.

Tyro chief executive Robbie Cooke said the company’s half-year performance was “a great result all round”.Credit:Peter Braig

"We're very pleased with the performance over the last six months," chief executive Robbie Cooke said.

The company's statutory loss for the half blew out to $19.2 million from $7.7 million in the prior corresponding period. The company put this down to funding an expansion into online retail that resulted in employee costs jumping by 16.6 per cent and a 46.3 per cent hike in marketing costs.

Tribeca Investment Partners portfolio manager Jun Bei Liu, who bought into the IPO, said the results were ahead of the prospectus forecasts and predicted the company would double, or triple, in size in a few years.

"It's very important for them to continue to invest," Ms Bei Liu said.

'I don't really see neobanks as competitors to us because they are trying to do everything. Home mortgages, credit cards, the full gamut. We're not.'

Founded in 2003, Tyro is a payment specialist that competes with the major banks for merchant customers. The firm declared itself "Australia's fifth largest bank" by terminal count, as it booked a 26 per cent jump in eftpos modules to 58,993 over the period.

Analysts have fretted over the risk posed by competitors to Tyro, be it as a smaller company taking on the big banks or a larger company staring down the emerging neobanks. Morgan Stanley warned the big four could suddenly build a tech-enabled payments platform to stamp out Tyro, but Mr Cooke said "there is no point whingeing" about competitors.

"The way you win in this space is to actually do what the customer wants. We're focused on giving merchants the best possible payment product. If we get that right, people will come to us. It does not actually matter what the big guys do," Mr Cooke said.

Tyro became an authorised deposit-taking institution in 2015 and faces the same amount of red tape as the big four. Mr Cooke said he was not worried about regulatory costs despite complaints from other companies operating in the sector.

"Post the banking inquiry, there hasn't been a raft of new laws, there's actually been a step up in the enforcement and oversight of the existing framework. We've always worked within that framework and we're comfortable with that.

"It's part and parcel of being a bank and if you have the right focus in your business, your customers, you'll be fine," he said.

Tyro has seen gains in its banking operation, with merchant loans increasing by 82 per cent in the half to $37.4 million. Similar leaps have been made in the take up of its deposit offerings, with 3100 active accounts holdsing a total of $39.7 million as of December 31 last year.

Mr Cooke said Tyro was focused on keeping its offering simple.

"I don't really see neobanks as competitors to us because they are trying to do everything. Home mortgages, credit cards, the full gamut. We're not," he said.

Looking forward, Mr Cooke said there were plans for Tyro to enter the accommodation and hotels sector but added a lack of brand recognition was the biggest hurdle facing the company.

In late afternoon trade, Tyro shares were 1.6 per cent lower at $4.28.

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Perpetual sees profits tumble amid ‘disruptive’ industry conditions

Investment house Perpetual has blamed mounting regulatory costs and disruptive geopolitical and macro-economic conditions for falling earnings at its financial advice and funds management businesses, which saw its profit slump 14 per cent in the latest half.

Net income dropped to $51.6 million in the six months through December, from $60.2 million in the same period last year, the Sydney-based financial services company said in a statement to the ASX on Thursday.

Perpetual Investments saw profit before tax tumble 20 per cent to $37.2 million as investors pulled $1.5 billion out of its funds under management and it earned lower performance fees. Earnings at the financial advice business, Perpetual Private, slumped 23 per cent to $17.4 million as the company digested its acquisition of Melbourne-based risk advisor company Priority Life and hired new advisers to its network.

Perpetual chief executive Rob Adams said challenging geopolitics had hurt the group’s performance. Credit:

The losses were slightly buffered by gains in Perpetual's corporate trust, which grew profits by 23 per cent thanks to "solid growth" in commercial property and managed investment funds as well as higher asset prices.

Chief executive Rob Adams said that while the entire financial services industry was impacted by challenging conditions, the diversity of Perpetual's three businesses would pave the way for growth in the future.

"During the first half of the year, regulatory, macro and geopolitical influences continued to disrupt the financial services industry, impacting the asset management and advice sectors," he said.

"The diversity of our three businesses enabled us to adapt and position the group for growth while remaining focused on supporting our clients and their needs," Mr Adams said.

The half-year results come after Perpetual acquired US-based social investor group Trillium Asset Management last month, adding an additional $5.5 billion in funds under management to the group. Mr Adams said this acquisition would help Perpetual expand its "geographic reach".

"Our acquisition of Trillium Asset Management will enable us to better meet the evolving expectations of our stakeholders as the ESG [environmental, social and corporate governance] revolution continues with demand for investments providing both positive returns and a positive long-term ESG impact."

The company will pay a fully franked interim dividend of $1.05 a share, down from $1.25 a year ago.

More to come.

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Cracks in the $1.3 trillion auto-finance market aren’t curbing investor demand for risky debt

It is boom time for junk-rated slices of subprime auto-bond deals.

Auto-loan delinquencies may have approached crisis-era levels recently, but that hasn’t put the brakes on demand for riskier slices of subprime auto-loan bond deals.

New subprime auto bonds with “junk” BB-ratings have been selling this month at yields as low as 3.5%, versus as high as 9% four years ago, according to bond tracking platform Finsight.

Demand has been so strong for low-rated subprime auto bonds that some investors now feel crowded out.

“Coming into this year, there’s been more cash chasing auto ABS,” said Toby Giordano, a portfolio manager at Braddock Financial in Denver, Colorado, a buyer of BB-rated subprime auto bonds, or asset-backed securities, in recent years.

“This is one area that pricing has tightened in,” he told MarketWatch. “And now that yields reside at 3.5%, there is just more compelling BB-rated paper elsewhere in structured credit.”

Bond yields move in the opposite direction of prices. Investors across fixed-income markets have been on the prowl for higher returns at a time when 10-year Greek government bond yieldsTMBMKGR-10Y, +0.07% have plunged below 1%, 10-year U.S. Treasury note yields TMUBMUSD10Y, +0.28% trade near 1.56% and the cost of U.S. investment-grade companies to borrow in the bond market has slipped to at an all-time low of 2.56%.

This chart from Deutsche Bank research tracks investment-grade bond yields since 1986.

Auto loan bonds differ from corporate or sovereign borrowings since their performance hinges directly on the ability of consumers to repay their debts, rather than a business or government.

Read: Tesla, gold and the dollar soar: An ‘everything rally’ has some stock-market investors fearing how it all ends

Consumers have benefited from a robust labor market, with the unemployment rate hovering near a 50-year low of 3.5%, while income gains have outpaced debt growth, a combination that should bode well for auto lenders, according to a Morningstar DBRS outlook published Wednesday.

But the credit-rating agency also warned that under a recession scenario, subprime auto bonds would be vulnerable to “increased delinquencies on the horizon because these borrowers tend to be more financially stretched and have fewer reserves, if any, than those of their prime counterparts.”

When Flagship Credit Acceptance sold its $355 million subprime auto-loan bond deal in early February, it pooled loans with a weighted average interest rate of 16.09% and average borrower FICO scores of 587, according to Kroll Bond Rating Agency.

Experian, one of the main U.S. credit-reporting bureaus, considers any borrower with a credit score between 580 and 669 to be subprime.

Bond-market investors typically earn higher yields when they buy lower-rated securities that come with higher risks of losses. Investors have been betting on U.S. consumers to continue driving the U.S. economy, which in July entered a record 11th year of expansion.

Federal Reserve officials gave bullish investors more reason to think a recession isn’t in the cards just yet, after the release Wednesday of minutes of the rate-setting Federal Open Market Committee’s January meeting, which signaled that the U.S. economic outlook looked brighter in late January than they had expected.

The minutes also suggested the central bank may be more inclined to ease rates than to raise them in the near term, which helped propel major U.S. equity benchmarks higher Wednesday, including the S&P 500 index SPX, +0.47% and Nasdaq Composite COMP, +0.87% , which scored record finishes.

But even with a favorable economic backdrop, recent data on U.S. household debt points a climb in late-stage auto-loan delinquencies.

The Federal Reserve Bank of New York said that 4.9% of the record $1.33 trillion pile of U.S. auto loans were at least 90 days past due in the fourth quarter of 2019, in its latest report on household debt.

That translates to roughly $65 billion of seriously past-due auto loans, a record when factoring in the significant growth of auto financing since the 2007-’08 financial crisis, per Fed data.

So why have investors been chasing the subprime auto-bond rally? For one thing, auto bonds are structured to cushion investors from some level of expected loan delinquencies and losses, which can total as much a 18% of certain subprime auto-loan transactions, according to Moody’s Investors Service.

This week, Moody’s underscored the point in a new report showing it downgraded zero auto bonds over the past 12 months ending Dec. 31, while upgrades were applied to almost 19% of the transactions it supplied with ratings for the same period.

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Mania has taken hold in the equity market and there is “no respect” for risk, says one strategist

Veggie-foods maker Beyond Meat BYND, +4.07% trades at 282 times estimated earnings. Tesla’s TSLA, +6.81% stock price has doubled this year. Virgin Galactic’s SPCE, +10.13% stock price has nearly tripled in 2020.

The world’s most profitable company, Apple AAPL, +1.66%, withdraws its revenue guidance, and the technology-heavy Nasdaq Composite actually closes higher on the day.

Mike O’Rourke, chief market strategist at institutional broker JonesTrading, says a “mania” has taken hold, blaming zero-commission retail brokers, the Federal Reserve’s injections of liquidity, the forced buying from index fund managers, and active fund managers who are too scared not to follow suit.

“The bottom line is there is no respect for risk in the equity market and mania is not indefinitely sustainable, there is no permanently high plateau,” he writes in a note referencing Rodney Dangerfield, the comedian who famously couldn’t command respect.

John Rekenthaler, a columnist at fund-ranking service Morningstar, attempted to divine when investing becomes speculation. It wasn’t an easy task. The conclusion he reached is that an expenditure when the return is too uncertain or likely negative is speculation. But even that is too simple a definition, he writes.

“Securities with barely positive expected returns and extremely high volatility are speculative — unless their performance is negatively correlated with the rest of one’s portfolio, in which case the investment may be warranted,” he says.

The chart

There is a record high level of unused share buyback capacity, according to JPMorgan, leading the bank to think buyback announcements will decrease. Higher valuations also may tempt companies away from new buybacks. Instead, companies may focus on capital expenditure, dividends and mergers and acquisitions, the bank said.

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Oil rises as prices score a boost from sanction of Russia’s Roseneft unit

Oil futures headed higher on Wednesday, with Brent oil aiming for a seventh straight advance, after the U.S. imposed sanctions on an arm of Russian oil giant Rosneft and as the reported number of new daily cases of China’s coronavirus declined.

On Tuesday, the Trump administration blacklisted the trading brokerage owned by Russia’s Rosneft that the U.S. accuses of helping the regime of Venezuelan President Nicolás Maduro.

Venezuela is already under severe U.S. sanctions as the Trump administration intensifies its campaign to remove Maduro from power.

“Venezuela’s exports, which have already seen long-term declines in recent years, could see a more pronounced drop in the weeks ahead following targeted US sanctions against the trading arm of Russia’s Rosneft,” said Robbie Fraser, senior commodity analyst at Schneider Electric. Rosneft has “played a key role in moving Venezuelan cargoes to major demand destinations.”

However, “the affected volumes aren’t necessarily to enough to rattle a crude market more concerned with demand weakness, though it could add targeted support to heavier crude grades,” said Fraser, in a daily note.

Against that backdrop, West Texas Intermediate crude for March delivery CLH20, +1.17% rose 73 cents, or 1.4%, to $53.02 a barrel on the New York Mercantile Exchange, after ending Tuesday’s session unchanged. The March contract expires at Thursday’s settlement.

April Brent crude BRNJ20, +1.33%, meanwhile, picked up $1.02, or 1.8%, to $58.77 a barrel on ICE Futures Europe following a gain of about 0.1% in the previous session.

Brent, the international benchmark grade for oil, was on track for a seventh straight gain.

Investors also were keeping an eye on conflict in Libya, as its United Nations-recognized government withdrew from peace talks in Geneva after an attack by rebel forces led by Khalifa Haftar. Production in the oil-rich region remains impeded due to the Libyan conflict, sources said.

“Libyan exports continue to flow at minimal levels as a civil war between [the Government of National Accord] and [Libya National Army] factions continues to block exports and corresponding revenues,” said Fraser.

Libya’s National Oil Corporation, or NOC, “reports that Libyan oil production has dropped to 123,500 bpd from pre-current crisis levels of 1.2 million bpd,” wrote Robert Yawger, director of energy at Mizuho Securities USA, in a Wednesday research report.

Combined with signs of slowing transmission of COVID-19—the infectious illness derived from the novel strain of coronavirus that reportedly originated in Wuhan, China—crude-oil markets have been tilting higher.

As of Feb. 18., China’s National Health Commission said there had been a total of 75,203 confirmed cases and 2,009 deaths, but investors have taking heart in a slowing pace of reported infections.

“Market fears about falling oil demand are not misplaced, but they have probably been exaggerated by the outbreak of the coronavirus and the resulting economic uncertainty,” economists at The Economist Intelligence Unit wrote in a report released late Tuesday.

“On the assumption that the spread of the coronavirus will be contained by end-March, we have revised down our forecast for China’s annual oil demand growth in 2020 to 2.5%,” from a previous forecast of 3%, they said. That would mark a “big fall from China recent oil consumption growth, which averaged just under 4% per year in 2016-19.”

“Given China’s outsized impact on global oil consumption trends, we now expect global oil demand to expand by just 0.9% in 2020,” from 1% previously, which would be the slowest rate of growth in three years,” the economists said.

Meanwhile, weekly updates on U.S. petroleum supplies will be released a day later than usual this week because of Monday’s Presidents Day holiday. The American Petroleum Institute’s report will be released late Wednesday and Energy Information Administration will issue its own figures Thursday morning.

On average, the EIA is expected to report a 3.3 million-barrel climb in U.S. crude inventories for the week ended Feb. 14, according to a survey of analysts conducted by S&P Global Platts. The survey also forecast a climb of 300,000 barrels for gasoline and a decline of 1.6 million barrels for distillates, which include heating oil.

On Nymex Wednesday, March gasoline RBH20, +1.26% added nearly 1.9% to $1.6447 a gallon and March heating oil HOH20, +0.68% rose 0.9% to $1.6875 a gallon.

March natural gas NGH20, -0.61% traded at $1.971 per million British thermal units, down 0.5%. On Tuesday, prices rallied by 7.8% to settle at their highest in a month on colder weather forecasts.

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Stocks rally toward records as Tesla tops $900

Tesla needs to raise capital, invest: Barron’s editor

Investment bank Piper Sandler raises the Tesla price target from $729 to $928. Barron’s senior editor Jack Hough explains how Tesla can remain profitable.

U.S. equity markets rallied Wednesday after the number of new coronavirus cases reportedly slowed.

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Mainland China reported 1,749 new cases of the virus as the death toll rose by 136. There are at least 74,185 confirmed cases and 2,004 deaths, according to China’s National Health Commission.

All three of the major averages were holding modest gains at the open; the Nasdaq hit a fresh record.

Ticker Security Last Change Change %
SP500 S&P 500 3383.56 +13.27 +0.39%
I:DJI DOW JONES AVERAGES 29310.36 +78.17 +0.27%
I:COMP NASDAQ COMPOSITE INDEX 9799.929821 +67.19 +0.69%

Looking at stocks, Tesla shares rallied above $900 apiece after Piper Sandler raised its price target to $928, the second-highest on Wall Street, citing its batteries and solar power business as the next big thing.

Virgin Galactic shares were higher for an eighth straight day, and are up more than 160 percent since their Oct. 28 stock-market debut.

Ticker Security Last Change Change %
TSLA TESLA INC. 917.55 +59.15 +6.89%
SPCE VIRGIN GALACTIC HOLDINGS INC. 33.26 +2.96 +9.77%

On the earnings front, Dish Network reported better-than-expected quarterly results as its subscriber loss slowed.

Wingstop reported digital sales soared 39 percent year over year in the fourth quarter, helping revenue top Wall Street estimates.

Meanwhile, Groupon’s fourth-quarter revenue slumped 23 percent from a year ago, missing estimates, and the company said it is planning to exit the goods category by the end of the year.

Blue Apron said it is exploring strategic alternatives, including putting itself up for sale, after posting a fourth-quarter loss of $21.9 million.

Ticker Security Last Change Change %
DISH DISH NETWORK CORPORATION 41.55 +0.26 +0.63%
WING WINGSTOP INC 101.72 +0.09 +0.09%
GPRN n.a. n.a. n.a. n.a.
APRN BLUE APRON HOLDINGS INC 3.42 -0.95 -21.76%

Elsewhere, West Texas Intermediate crude oil was up 1.4 percent at $53 a barrel and gold climbed 0.5 percent to $1,611 an ounce, its highest in nearly seven years.

U.S. Treasurys were lower, pushing the yield on the 10-year note up by 1.2 basis points to 1.568 percent.

In Europe, France’s CAC and Germany’s DAX gained 0.6 percent and 0.5 percent, respectively, while Britain’s FTSE was little changed.

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Asian markets were mixed with Japan’s Nikkei up 0.9 percent, Hong Kong’s Hang Seng higher by 0.5 percent and China’s Shanghai Composite down 0.3 percent.

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Groupon loses $14M, ditches merchandise discounts

Groupon looks to make a big purchase

Fox Business Briefs: The daily-deals company is reportedly looking to acquisitions as shareholders show more concerns over its finances and stock price.

Groupon Inc. cratered after reporting a loss for 2019 and announcing plans to drop promotions for merchandise from toys to clothes while focusing on experiences such as travel and entertainment.

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The Chicago-based digital deals platform lost $22.4 million, or 4 cents a share, for the year as revenue fell 6.6 percent to $1.13 billion.

For the fourth quarter, Groupon earned a profit of $77 million. Adjusted earnings were 7 cents a share, trailing the 15-cent average estimate from analysts surveyed by Refinitiv. Revenue fell 23% to $612.3 million, trailing projections of $709.4 million.

Ticker Security Last Change Change %
GRPN GROUPON INC. 3.05 +0.22 +7.77%

"We did not deliver the financial performance we expected during the fourth quarter, and we recognize we must move swiftly to put Groupon back on a growth trajectory," Groupon CEO Rich Williams said in a statement.

MACY'S CUT TO JUNK AS TURNAROUND PLAN SPARKS CONCERNS

Following a review of strategic alternatives, Groupon said it will exit the North American goods category by the end of the third quarter and globally by the end of the year and focus on a local experiences marketplace that it estimates to be worth “north of $1 trillion.”

For the remainder of the year, Groupon set an operational goal of launching a new mobile app and expanding its bookable offers while posting year-over-year North American unit growth in the second half.

The company expects to deliver annual revenue growth in the mid-single digits by 2022.

Its board of directors approved a reverse stock split at a ratio of between 1-for-10 and 1-for-12, which is subject to shareholder approval.

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Groupon shares rose 27.6 percent this year through Tuesday, outperforming the S&P 500’s 4.3 percent gain.

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Hedge Funds Keep Backpedaling From S&P 500’s Biggest Winners

In this article

Some of the most prominent investors are breaking from the crowd that has been chasing the rally in U.S. technology stocks.

Hedge fund managers, whose positioning is closely watched as a gauge of market sentiment, have been selling technology shares for a third month, according to prime brokerage data compiled by Goldman Sachs Group Inc. Over that period, they’ve unwound about half of the inflows that were accumulated during the previous nine months.





While tech stocks remain one of their favorite sectors, the retreat means some foregone profits for an industry that’s been struggling to keep up with the market. Computer and software makers have rallied 16% in the past three months, beating all other major sectors in the S&P 500 and doubling the benchmark’s gain.

“It appears that hedge funds have been fading the rally in U.S. info tech stocks,” Goldman said in the note to clients, without giving any hints on the rational behind the rising skepticism.

Tech shares have been on a tear in recent months as investors continue to flock into companies whose sales are perceived as resilient amid a slowing economy. At 29 times earnings, tech stocks were traded at a 28% premium to the S&P 500, the most since the U.S. bull market began in 2009.

But Apple Inc.’s warning on missing its quarterly revenue forecast because of the coronavirus outbreak in China showed the group may now be more vulnerable to a global slowdown, at least for now. China plays a central role in global manufacturing, especially technology. Just about every major piece of consumer electronics is made in the country, from iPhones and gaming consoles to half the world’s liquid crystal display or LCD screens.

While there is no shortage of reasons for caution, nothing has been able to halt tech’s momentum. Despite Apple’s warning, the tech-heavy Nasdaq 100 eked out a gain Tuesday, while the S&P 500 slipped. So much love exists among investors that being long U.S. tech and growth stocks was cited as the most crowded trade for a fourth straight month, according to Bank of America Corp.’s latest survey of money managers.

The affection can also be found in exchange-trade funds. About $3 billion has been added to ETFs focusing on tech stocks this month, poised for the biggest inflows since August 2018, data compiled by Bloomberg Intelligence showed.

While others are piling in, hedge funds are pulling out. Their disposal last week, concentrated in software and technology-services providers, exceeded all other sectors, Goldman’s data showed.

In another piece of evidence about the industry’s growing weariness, tech’s combined value in all hedge funds tracked by Bloomberg stayed little changed during the fourth quarter, when the shares jumped 14%. While it’s not exact science, flat value during a rally could mean some positions were cut.

Missing out on some of the market’s best rallies may be one reason why hedge funds are off to a slow start to the year. Equity funds tracked by Hedge Fund Research are up less than 1% this year, compared with an increase of more than 4% for the S&P 500.

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China struggles to return to work after the coronavirus lockdown

London (CNN Business)A version of this story first appeared in CNN Business’ Before the Bell newsletter. Not a subscriber? You can sign up right here.

Apple’s surprise announcement that the coronavirus outbreak will prevent it from hitting its first quarter revenue targets sent a shiver through global markets. Now, investors are concerned: Is every company with exposure to China at risk of coming up short between January and March?
US stocks are up slightly in premarket trading, but declined Tuesday on the back of such fears.

    That some US firms will be affected is clear. Nick Raich, CEO of The Earnings Scout, told me recently that he’s seen earnings-per-share estimates for the first quarter come down “at increasing rates” in the past week or two.
    “Some of this is because of the volume of companies reporting in the US has increased, and some of this is certainly because of the coronavirus and its impact on economic activity in China,” he said.

    So far, it’s not a five-alarm fire. As of Friday, 51 S&P 500 companies had lowered their guidance on profits for the first quarter, according to FactSet. But that’s roughly in line with past years.
    FactSet analyst John Butters did, however, warn that markets could be hit with more warnings like Apple’s in coming weeks. That could ding sentiment just as Wall Street is getting more optimistic that the situation in China could be coming under control.
    “Given the large number of companies that did not update or modify guidance due to the impact of coronavirus, it is possible that there will be an increase in the number companies issuing negative guidance later in the first quarter as these companies gain clarity,” he told clients.
    The bigger picture: Analysts maintain that their anxiety is limited to the first quarter, and most 2020 forecasts don’t look totally out of whack. “This could be a very short-lived one quarter blip,” JJ Kinahan, chief market strategist at TD Ameritrade, told my CNN Business colleague Anneken Tappe.
    But Apple’s problems could keep investors on edge, especially given Big Tech’s outsize role in delivering earnings wins. Profit at US companies would have dropped by 7.5% last year without Microsoft, Alphabet, Apple, Amazon and Facebook, Societe Generale’s Andrew Lapthorne wrote in a note to clients this week.
    The latest: Adidas said Wednesday that its business activity in China since the Lunar New Year is down 85% compared to last year.

    Virgin Galactic’s stock is rocketing up

    Amid market concerns about the impact of the new coronavirus, at least one stock is doing spectacularly well: Virgin Galactic, which has shot up 162% this year after going public last October.
    The company’s shares have moved higher for the past seven trading sessions, leaping 21% last Friday and gaining another 5.7% on Tuesday when US markets reopened.
    What’s up: Investors are increasingly optimistic about Virgin Galactic’s plans to launch a commercial space service. The company announced last week that it relocated its SpaceShipTwo suborbital plane, also known as VSS Unity, to its commercial headquarters in New Mexico. That brings the company one step closer to eventually launching paying passengers into orbit, my CNN Business colleague Paul R. La Monica reports.
    The catch: Virgin Galactic is currently unprofitable and is expected to continue losing money through 2021.
    Plus, the company hasn’t issued a quarterly financial report since going public. That raises the stakes for fourth quarter results coming February 25.

    Why asset managers are under pressure to merge

    Tuesday saw a big announcement in the world of asset managers: Franklin Templeton said it was buying rival Legg Mason in a deal worth $4.5 billion, creating a company with $1.5 trillion in assets under management.
    Call it the BlackRock and Vanguard effect. The former has $7.4 trillion in assets under management, while the latter managed $5.6 trillion as of August. With fees being rolled back across the industry, size matters more.
    That’s in part because investors are flocking to passive investment options such as ETFs, weighing on smaller competitors that have traditionally focused on stock picking or more active management strategies.
    Jonathan Miller, Morningstar’s head of fund research, notes that the tie-up between Franklin Templeton and Legg Mason is part of a broader trend of active managers consolidating. “Active managers are closely mapping out their future trajectory amid fee compression, outflows and the threat from passive funds,” he said in a blog post.

    Up next

    Hyatt Hotels (H), IMAX (IMAX), Jack in the Box (JACK) and Zillow (Z) report results after US markets close.
    Also today:

      • The US Producer Price Index for January arrives at 8:30 a.m. ET. We’ll also get housing starts and building permits for the month.
      • Minutes from the Federal Reserve’s meeting in January post at 2 p.m. ET.

      Coming tomorrow: The latest data on consumer confidence in Germany as recession fears reemerge.
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