Bags in red but coronavirus will not lead to global recession

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In America they call it the “Fomo” syndrome. It stands for «Fear of missing out». That is, “fear of being excluded” from the stock exchange rally. Judging by how the markets are behaving these days, one would say that the “Fomo” syndrome is beating coronavirus psychosis: after a day of panic, on Monday, the markets in fact started between Tuesday and Wednesday.

The prevailing opinion among investors is that the Chinese “influence” will have a negative impact on the economic growth of the Asian country in this quarter, but – as happened in similar cases in the past – the slowdown will be more than offset by the growth in the following months . So nothing that can really scare, unless the epidemic degenerates and becomes a pandemic. In short, rather than worrying about the virus, investors today seem to be afraid of staying out of a rally that could soon resume. “Fomo” beats viruses precisely.

GLOBAL RECESSION OUTSIDE THE RADARS

Likelihood that the world economy will end in recession within 12 months. Data in percent. Source: Pimco recession model

The bet on growth
To understand if they are right, we will have to see how much the global economy will grow. This is the true needle of the balance in 2020. If last year the stock exchanges have flown to historic highs driven by the great liquidity created by central banks (globally 48 of them have cut rates overall 88 times for a total of 9 thousand basis points, according to JP Morgan Am calculations), this year economic growth will have to come to justify that rally. In 2019, the flow of the stock exchanges was in fact driven almost exclusively by the increase in multiples: share prices rose faster than corporate profits. So if this year the economic growth and profits of the companies will not justify that stock exchange effervescence, some problems could arise.

That’s why the performance of the economy will be fundamental. And here comes the question: coronavirus could be the Black Swan 2020, that is, that unexpected event capable of changing the scenario for the worse? As said, almost nobody thinks about it on the market. On the contrary: almost everyone is lowering the chances of a recession in 2020. Both for Pimco (which has an ad hoc index) and for JP Morgan AM this year the chances of the global economy falling into recession have dropped to 20%. They were 30-40% only in mid-2019.

“The virus will certainly have an economic impact in this quarter in China – notes Nicola Mai, Pimco’s sovereign credit research manager in Europe -, but if you look at other similar epidemics, the effect should be limited in time. In terms of investment portfolio, nothing changes. ” Similar opinion for Robert Michele, JP Morgan AM’s global fixed income manager: “The market does not have low valuations if you look at historical averages – he comments – but if you look at the amount of liquidity printed by central banks then the rally can continue”. As if to say: as long as central banks remain so generous, market support remains.