WeekWatch 10/02/2020 - What will the Coronavirus mean for global growth?

Stock Take

“If you know the enemy and know yourself, you need not fear the result of a hundred battles. If you know yourself but not the enemy, for every victory gained you will also suffer a defeat. If you know neither the enemy nor yourself, you will succumb in every battle.” Some 2,500 years after it was written, Sun Tzu’s The Art of War continues to be a staple of military academies around the world, from West Point to Sandhurst to the People’s Liberation Army National Defence University in Beijing.

Xi Jinping’s government may see several enemies on the horizon but, for now at least, the coronavirus is very much dominating the view. Last week, state-run media published claims that a “major breakthrough” had been made in finding a cure for the disease, which has now topped 900 lives. A Hong Kong doctor has pointed out that even the Wuhan fatalities figure only includes cases admitted to hospital – the true tally could be much higher.

Following the reports of a possible cure, the World Health Organization said on Wednesday that, as yet, “no known therapeutics” have been identified. Hopes of a possible lull in the death rate vanished on Thursday, and many Chinese factories remain closed to stem the virus's spread.

“Our best guess is that the economic disruption related to the coronavirus will cost the world economy over $280 billion in the first quarter of this year,” said Capital Economics. “That would mean that global GDP will not grow in quarter-on-quarter terms for the first time since 2009. We assume the virus will be contained soon, and that lost output is made up in subsequent quarters, so that world GDP reaches the level it would have done had there been no outbreak by the middle of 2021.”

China’s reassurance about making progress in finding a cure did boost markets last week, as did Beijing’s decision to cut tariffs in half on $75 billion of US goods, as part of the process of implementing the recent phase-one trade deal with the US. Oil was another beneficiary, as traders feared major quarantine policies could hit demand.

Traders also returned from their Chinese New Year breaks last week, and the Shanghai Composite rose gradually over the course of weekly trading. Data showed that the country’s services sector grew only sluggishly in January, but business expectations and credit growth both rose. Moreover, until the virus struck, Hong Kong’s economy was finally showing signs of a muted recovery. New analysis by Morgan Stanley posits that Beijing will offer at least as much fiscal stimulus in 2020 as it did in 2019.

All about Washington

In the US, manufacturing orders enjoyed a major boost in December thanks in part to military hardware orders from the Pentagon. With mortgage rates at multi-year lows and small business wages rising fast, there are still plenty of positive signs to be found in the economy. The percentage of S&P 500 sectors at record valuations is at 70% – above where it reached in the tech bubble. But longstanding growth and plenty of Fed support has helped to buoy prices.

Last Friday’s payrolls report offered a further boost, as it showed that 225,000 jobs were added to the US economy in January. The unexpected boost lifted the dollar, although that apparently capped any further gains on the S&P 500, which had risen earlier in the week.

However, the developments that seem to be moving markets most in the US this year come not from New York but from Washington. Donald Trump’s impeachment charges were predictably knocked down in the Senate, where a two-thirds majority is required for them to progress. That removes one worry for the administration.

Yet there are reasons to believe the impact is not yet over. For one, Mitt Romney, a senior Republican, voted in favour of impeachment. For another, the president faces a far bigger vote in November, when the country goes to the polls. With the Iowa caucus now (finally) accounted for, Bernie Sanders has shot ahead to become odds-on favourite to win the Democrat nomination, overtaking the more moderate Joe Biden.

Brexit: Au revoir, Auf Wiedersehen...good riddance?

In Europe, the UK’s departure from the EU saw a mistranslation perhaps especially suited to the occasion. It fell to Irena Andrassy, Croatia’s permanent representative in Brussels, to pronounce the EU’s last words to the UK’s own representative at a final meeting of ambassadors in Brussels. Turning to Sir Tim Barrow, she said “Thank you, goodbye and good riddance”.

After the laughter, however, comes the hard work. With the contentious Withdrawal Agreement now formally out the way, the prime minister has been keen to emphasise the need to diverge in key areas. George Osborne, former chancellor and now a senior adviser at BlackRock, sees some sense in this approach.

“For financial services, it does not make sense to align completely with EU regulation – in some ways it makes more sense to diverge,” said Osborne. “The UK was the prominent voice for competitiveness in financial services in the EU parliament – this has now gone and the EU may become less competitive as a result.”

Wealth Check

Spouses and civil partners will now receive an additional £20,000 of their partner's estate if they die without making a Will, under new rules introduced last week by the government in England and Wales.

Experts welcomed the increase, which has been revised to take account of inflation since the rules were last updated in 2014. However, many were quick to point out that having a Will in place is the only way to guarantee a surviving partner is provided for as the deceased would wish.

Dying intestate – without leaving a Will – can create huge and distressing complications for widows, children and relatives of those who pass away. Under current rules, spouses and civil partners will inherit their partner’s entire estate if there are no children. If there are children, partners will inherit all of the deceased’s property, the first £270,000 of the estate and half of the remaining estate – the other half will go to their children.

Many people are unaware that, under intestacy laws, unmarried partners cannot inherit. With cohabitation doubling over the last 20 years, many unmarried couples with children are putting their families at risk by not having a plan in place for after they have died.1

Approximately 30 million people in the UK do not have a Will.2

“The changes to the intestacy rules are clearly welcome, however, they are no substitute for a valid up-to-date Will and a family wealth plan. Only with those in place can you ensure that your wishes are fulfilled and your wealth is distributed as you would want.,” said Edward Grant, Director, Technical Connection at St. James’s Place.
 

The levels and bases of taxation, and reliefs from taxation, can change at any time and are dependent on individual circumstances.
Wills are not regulated by the Financial Conduct Authority. Will writing involves the referral to a service which is separate and distinct to those offered by St. James's Place.

1Office for National Statistics, August 2019
2Farewill, February 2020

KKR is a fund manager for St. James's Place.

The information contained is correct as at the date of the article. The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.

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1 Source: Business Insider, 31 January, 2020

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