The risk emanating from the coronavirus
(COVID-19) outbreak isn’t yet fully priced in by the markets
and its economic implications remain unknown, say experts.
Investors on Monday were caught off-guard by the sharp selloff in stocks amid an increase in COVID-19 cases in countries, such as South Korea, Italy, and Iran.
“From a financial market standpoint, we think the tail risks of a more prolonged and higher magnitude disruption from COVID-19 remain underappreciated by the markets,” says a note by global money manager Franklin Templeton.
Major global indices and stocks were hovering around their record levels until last week on hopes that the outbreak would be contained. On February 12, the US’ Dow Jones Index hit a fresh record high. The same day, the Sensex closed less than a per cent shy of its record closing. “The markets
appear to be pricing-in a V-shaped recovery as the base case for the Chinese economy and global growth, though some concerns over the longevity of the economic impact have appeared to affect risk assets in recent days,” the note added.
With countries — such as Afghanistan, Kuwait, and Bahrain — reporting their first infections and South Korea, Italy, and Iran declaring high alerts, many are fearing peak of the epidemic could not have been reached yet.
As a result, the full extent of the economic and market implications is difficult to be quantified, they add.
Given the uncertainty, investors are moving funds out of risky assets and into safe-havens, such as gold and bonds.
Gold, a traditional safe-haven asset, saw its price hit record high. The 10-year US Treasury hit fell to its lowest level since 2016, while its 30-year Treasury dropped to an all-time low. Germany's 30-year bond yield turned negative for the first time since October. The safe-haven trade is even driving demand for the new-age asset class, such as cryptocurrencies. The price of bitcoin has soared nearly 40 per cent in 2020. Meanwhile, global oil prices, a barometer for the health of the global economy, continues to tumble. On Monday, Brent crude fell over 3 per cent, extending their year-to-date slide to 16 per cent.
"The demand for safe-haven assets has spiked as fresh coronavirus
cases in South Korea and Italy indicate that business impact could be worse than thought earlier,” says Vinod Nair, head of research at Geojit Financial Services.
“A big global risk-off could potentially result in outflows from emerging markets
and trigger a flight to safety. Outflows from domestic debt and equity may put pressure on the rupee. Offshore fundraising by Indian corporates is also likely to slow down,” says a note by IFA Global.
Investment experts say given the economic uncertainty caused by COVID-19, investors should look to diversify their investments.
“The rapid spread of COVID-19 is a stark reminder that unexpected events can occur any time, and that portfolio diversification remains critical when the markets are priced for perfection,” the Franklin Templeton note states.