Coronavirus and Falling Oil Prices Roil Markets; Long-Term Perspective Is Key
Amid a volatile start to the week, members of the Matthews Asia investment team met to discuss the outlook following recent events: Yu-Ming Wang, President and Global Chief Investment Officer; Robert J. Horrocks, PhD, Chief Investment Officer and a Portfolio Manager; Richard Gao, Research Principal, China; and Portfolio Managers Teresa Kong, CFA, John Paul Lech, Yu Zhang, CFA, Sharat Shroff, CFA, Andrew Mattock, CFA, and Tiffany Hsiao, CFA. Expecting volatility to continue in the near term, the team believes that maintaining a long-term perspective is crucial for meeting long-term goals.
Q: Can you help us put the current markets in perspective?
Yu-Ming Wang: High yield corporate bond returns have fallen about 8% (as represented by the ICE Bank of America Merrill Lynch U.S. High Yield Index), while global equities returns have fallen about 17% from recent peaks (as represented by the MSCI All Country World Index). In 2008, corporate bonds fell 36% while the equity market fell 56%. In prior market calamities such as the global financial crisis of 2008, the dot-com bust of 2000 and the Asian Financial Crisis of 1998, respective benchmark indices fell 40% to 50%. So, today's volatility is still “young” compared with past market drops. But is our current market rout going to be like those prior crises? That is the trillion dollar question. I think this market crisis is still evolving. Some signs:
- Monetary boost is unlikely to be as potent as in prior crises
- Any fiscal boost is still unclear. Given the geopolitical tensions of the past two years, I am not counting on any global coordinated efforts
- The virus contagion has not yet found a peak
- On top of these, the energy market is adding great stress to the credit market
Q: What are the root causes of the current market volatility?
Richard Gao: I see the coronavirus as the primary root cause. Ironically, the market closest to the epicenter, China A-shares, has experienced the least amount of damage. This will likely change in the coming weeks as it becomes increasingly clear that the U.S. and Europe will experience a consumption shock. This will in turn negatively impact orders in China and the recovery that is underway. We are ready to put money to work when this happens.