Tuesday, March 3, 2020

COVID19 Highlights Need for Diversified Portfolios

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What’s happening: Stock markets across the globe have recorded steep declines over the past couple of months on investor concerns around the impact of the coronavirus on global economic growth. Analysts suggest investors mitigate the virus impact with a diversified portfolio.

What happened: Global stock markets have lost more than $1 trillion due to coronavirus-related concerns. US stocks declined for seven consecutive days by the end of Friday’s trading session having recorded their steepest weekly loss since the 2008 financial crisis. Japan’s main stock index Nikkei 225 was down around 6% and the Shanghai Composite index lost more than 3% in February. Futures for the UK 100, Dax and CAC 40 are all down more than 6%.

While coronavirus continues to spread, leading economists are projecting a slowdown in economic growth. Against this backdrop, there are certain investment approaches investors could adopt to prepare their portfolio.

Why it matters: South Korea, Iran and Italy have continued to report confirmed coronavirus cases and deaths, while other countries like the US have also reported their first few cases. Fears were fuelled even more by the OECD’s (Organization for Economic Co-operation and Development) interim outlook, released yesterday. OECD's chief economist Laurence Boone said during a teleconference that the virus outbreak could be "a further blow to a global economy that was already weakened by trade and political tensions." In the worst-case scenario, global economic growth could drop to 1.5% in 2020, which is half the rate the organization projected before the outbreak.

How to Trade COVID-19: Even amid this gloomy outlook, there are ways in which investors can make the best of the situation. Several analysts have highlighted the importance of a well-diversified portfolio for the weeks to come. A portfolio that has a healthy mix of stocks, bonds, currencies, metals and other assets can make the ride less bumpy for investors.

The dramatic decline in equities has presented attractive entry points for shares of several strong companies. Emerging market stocks may perform better than European stocks in the upcoming weeks, especially if the daily number of coronavirus cases from China continue to decline and those from Italy, Iran and the US rise.

With more people staying home fearing spread of the disease, stocks of retailers with an ecommerce focus and digitally focused stocks could perform better. These may include stocks like Alphabet (Google’s parent), Disney, Netflix and Twitter. With more people opting for remote working, companies that have online business models are positioned more strongly. Pharmaceutical stocks like those of Gilead Sciences and Inovio Pharma, which are actively working on coronavirus vaccines, may also prove to be good plays in the near term. Investors can also consider companies that offer a healthy dividend yield.

Analysts further suggested that investors should also keep a close eye on the market, as volatility may offer attractive trading opportunities. Moreover, CFD trading offers opportunities even in a declining market. Cryptocurrencies and gold can be included in the portfolio as a hedge against economic uncertainty.

The Markets Today

     

Investors will be watching US stocks today, with all three major indices delivering major recoveries on Monday. The indices had posted strong selloffs in the previous week.

Context: US stocks closed higher on Monday, with the Dow recording its highest single-day percentage rise in around eleven years, driven by hopes of policymakers easing monetary policy to combat the coronavirus impact on the global economy. However, the central banks of some major economies don’t have the elbowroom needed for this.

Details: After closing out the worst week since the 2008 financial crisis, all three major indices delivered their biggest one-day point gains on Monday. Investor sentiment was not dampened even by the disappointing reports from the US and other countries, including downbeat readings for US ISM manufacturing and Chinese PMI. Investors are expecting the Federal Reserve and other central banks to cut interest rates to support global equities. Goldman Sachs also expects the Fed to lower rates even before the scheduled March meeting.

Despite the hopes, the European Central Bank and the Bank of Japan have no leeway to lower interest rates, which are already in negative territory. The Reserve Bank of Australia lowered its cash rate by 25 basis points to 0.5%, setting a new record low. The lower interest rates may be a feeble attempt at boosting economic activity, while very low rates can lead to inflation, thereby reducing purchasing power and threatening the sustainability of economic growth.

The Dow, which nosedived 12.4% last week, climbed 1,293.96 points to close at 26,703.32 on Monday. Meanwhile, the S&P 500 gained 4.6% and the Nasdaq added 4.5%.

China is continuing to report a decline in daily numbers of confirmed coronavirus cases, with the country reporting 125 new confirmed cases on March 2, down from 202 on March 1. However, cases outside China continued to accelerate, with South Korea confirming 600 new coronavirus cases and 3 new deaths. Health officials in Washington announced 4 additional deaths from COVID-19.

In corporate news, Forty Seven’s shares spiked around 62% after Gilead Sciences announced plans to buy the company. Shares of Mobile Mini also gained over 5% after the company agreed to be acquired by WillScot Corp.

On the economic data front, the ISM’s manufacturing index tumbled to 50.1 in February, versus a prior reading of 50.9 in the previous month.

In other news, yield on the US 10-year Treasury slipped 4.2 basis points to 1.085%. The US dollar index, which measures the greenback’s performance against a basket of currencies, slipped 0.8%.

Why it matters: The rally in stocks, driven by expectations of a rate cut, is likely to accelerate today. US stock futures are also pointing towards a higher open this morning. The economic calendar will be light today, but investors will still be awaiting reports on economic optimism and current business conditions.

What to watch: The market will look at the major indices, with stock futures pointing towards a higher start. The Economic Optimism Index, which remained unchanged at 59.80 in February, is expected to slide to 58.1 in March.

Other Markets: Most European indices closed higher on Monday, with the FTSE 100 and CAC 40 up 1.13% and 0.44%, respectively. However, the German 30 was down 0.27%.

Support & Resistances
for Today

     

market snapshot

     

Futures at 0400 (GMT)

News shaping
the markets today

     

What else to watch today

     

US Redbook index, Spain’s six-month and twelve-month Letras auction and the speech by member of the ECB’s executive board Isabel Schnabel.