SYDNEY: The rapid spread of the coronavirus is prompting strategists to tweak their calls across major asset classes as investors continue to assess its impact on the global economy.
From taking profit in bonds to being wary of too much equity risk, firms including Citigroup Inc. and JPMorgan Chase & Co. are among those that have moved to adjust their views even as risk appetite remains resilient despite the increasing death toll and number of infected people.
While China-watchers have been quick to assess the near-term hit to growth and the increased funding challenges for swathes of its corporate sector, mapping out the implications for assets in other countries has arguably been tougher.
Here are how some investors have shifted their forecasts this week:
Crest in Bonds
The risk-on vibe that’s playing out in markets this week prompted Citigroup strategists to take profits on a long U.S. Treasuries trading recommendation they made last month.
"Given price action dynamics in both rates and equities over the past two trading sessions, we are booking some profits, and wait to see if the number of cases internationally grows significantly, ” the team including Jeremy Hale wrote Tuesday.
Similarly, Aberdeen Standard Investments ended long-duration plays on Australian and Canadian bonds as well as Treasuries, saying the rally had gone too far. Unless the coronavirus behaves differently to previous pandemics, it will be short-lived, Garreth Innes, who helps oversee the equivalent of $3 billion as head of Australian fixed income, said Wednesday.
"We still have a long-duration bias, but not at these levels. We want to see more of a sell-off -- and bonds have moved a lot further than currencies or risk assets.”
Nomura Holdings Inc. has flipped some of its top currency calls for 2020 just a month into the year. It recommends long dollar positions against Thailand’s baht and the Chinese yuan. Back in December, shorting the greenback versus these low-yielding Asian currencies was among its key trades for this year. Nomura is also advising selling the Singapore dollar against a basket of its trading partners.
"We may go into high-yielders like India and Indonesia once the global external backdrop begins to stabilize a bit, ” said Craig Chan, Nomura’s global head of FX strategy in Singapore, on Monday.
Investors should rein in risk, JPMorgan says. The bank’s strategists trimmed their overweight call on equities to 5% relative to a benchmark allocation, from 7%.
"We are reluctant to chase short-term momentum, ” strategists wrote Wednesday. "Instead, we tactically trim the risk of our portfolio further.”
Barclays Plc strategists led by Emmanuel Cau wrote Wednesday that "as our base case remains one of a mild global recovery and mid-single digit equity upside in 2020, we would use further weakness as a buying opportunity.” While there’s a range of potential outcomes with regard to the virus, financial conditions are "easy” thanks to central banks, and the positioning of long-only funds in stocks is "light, ” they wrote.
Over at Citigroup, the strategy team is warning about a sense of euphoria and "substantive” complacency in financial markets, when the impact of the coronavirus is not yet clear.
"Pretty much every client we talk to wants to buy the dip, and that is not comforting, ” wrote Tobias Levkovich, the bank’s chief U.S. equity strategist. - Bloomberg
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