Furthermore, technical selling is playing a role in exacerbating market moves. With the S&P 500 now having traded through its 50-, 100-, and 200-day moving averages, we could see continued volatility-driven by forced selling in the week to come.
Putting the human tragedy of these infections to one side, the market is still uncertain how to price the rapid increase in infection rates versus the low absolute number of cases outside of China. However, the fear of contagion outside of China has now led to a rapid market correction and significant cuts to growth estimates.
What lessons do we draw from our disaster playbook?
While every case is different, history shows that once a disaster hits and markets sell off, investors may make reasonable projections about the initial growth slump, but tend to be bad at pricing in how quickly growth can recover. To be sure, while we cannot say exactly when the coronavirus uncertainty will peak, we think many of the conditions that can allow for a rapid recovery are in place. And though volatility has picked up, historically when the VIX index is over 25 and bank lending standards remain loose, US equity market returns over the next six months have been over 15%.
Where are the opportunities today?
1. Prefer EM to DM equities
Emerging market stocks have begun to outperform developed market stocks in recent days, as a result of greater evidence of successful containment in China, and growing fears about the virus spreading in Europe and the US. We expect this trend to continue and are overweight EM equities with a particular preference for China within emerging markets. We are more cautious on the Eurozone.
2. Buy oversold sectors
See the full Alert to read more on sectors that we think have now been oversold, including US consumer discretionary and US communication services.
3. Buy into long-term winners
The sell-off in equities offers investors opportunities to enter longer-term investment themes at discounted prices. The virus outbreak is likely to accelerate some of the key secular trends driving markets in the coming decade. Click here to read more.
4. Enhance your yield and take advantage of higher volatility
Aside from the plunge in equity markets in recent days, the drop in 10- year US Treasury yield has been one of the most notable moves in global markets. Yields are now at a record low of 1.28% on the 10-year at the time of writing, and the market is now pricing a 65% chance of a Fed rate cut at the March meeting.
Our favored strategies at present include buying dividend-paying and quality stocks—we note that the gap between dividend yields and bond yields in Europe is now close to a record high. We also view European bonds in the crossover zone between investment grade and high yield as potentially attractive.
5. Get your portfolio fit to face the virus
The crisis has clearly shown the effectiveness of holding a mix of equities, bonds, and alternatives in a portfolio, with strong performance from bonds helping cushion declines in equities. Investors should view the initial phase of the outbreak as a stress test, and take the opportunity to get their portfolios prepared for future risks through asset class and global diversification.
Mark Haefele, Global Chief Investment Officer GWM
See the CIO Alert: Opportunities amid COVID-19 sell-off, 27 Feb. 2020.