Are global markets recovering too soon?

Release Date: 21st February 2020



Hope our last informal update on the coronavirus was useful.

At Frontier, we don’t typically give specific views on global markets or the global economy, because we think views given by large global investment houses, IMF or World Bank who have much more expertise and knowledge on this would be much better than a view we provide, sitting in our offices in this tiny island of Sri Lanka.

Typically, we would use a consensus view or the current market conditions as our underlying global markets assumption for our outlook on Sri Lanka. But right now our feeling is that global markets recovery from the Virus worries in the recent weeks has been too much and could set to disappoint. (The S&P500 has recovered 4.6% from its low point on 31st Jan)

This view from Goldman mirrors what we feel – Goldman says market underestimating coronavirus risk: ‘Correction is looking much more probable’

But we must note that there have been a lot of views out there on how the coronavirus will impact the global economy, some are positive, some are negative, and others are more neutral.

While markets are recovering and oil prices have also risen back up; from the perspective of some countries and from how supply chains are being impacted, we are now thinking more along the lines of Goldman Sachs - that there will be a new round of negative views coming out soon. These are views based on how global companies would report a weak outlook as a result of the virus.

Responses and the impacts of domestic businesses are also well summarized in this poll carried out by the Ceylon Chamber of Commerce. It highlights the disruption to supply chains due to lower imports from China and the limitations of business travel since the outbreak.

What we are looking at now

Singapore - There has been a steady increase in cases in Singapore, and it’s as fast as the spread in China. This is also important because so far Singapore has been the most transparent and given the most details about the outbreak.

This site is a great resource - they give updated visuals with many details including how transmissions have happened, where outbreaks have been higher, etc.

South Korea and Japan - South Korea saw about 50 new cases within a day, and Japan has also been seeing continued outbreaks which have started to spread outside Tokyo as well. So, these kinds of outbreaks could continue to bring negative news cycles and then impact company performance later on as well.

Oil prices - To see how it progresses, oil prices will remain a key thing to look out for. Prices have recovered after falling to around US$ 53 per barrel back near US$ 60 per barrel today, but if news cycles start going negative again, then this might fall. Either way, keeping an eye out for oil prices is helpful because of how directly it impacts Sri Lanka’s BOP.

What it means for our views

Frontier is not changing its views right now, and since markets are now recovering, it seems to show that there is no need for a change either. But if we go by what Goldman Sachs says and a situation of more negativity comes about, it’s possible that oil prices stay very low and global interest rates decline further. In a sense, we are anticipating that there could be second-order impacts that lead to a better outlook for rates/LKR than we have in our current base case. And if this happens, we’ll be ready to change our views, so we want to alert you that we might change our views IF things turn around again.

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