- Despite investor optimism in January 2020, consensus earnings forecast revisions have declined over the past four weeks, coinciding with the coronavirus epidemic in China.
- Downgrades led by declines in oil, hotels, leisure and auto sectors.
For the technology sector, most prominently Apple has in recent days highlighted a double whammy of supply constraints and a sharp fall in Chinese demand. This is in addition to the difficulties that contract manufacturer Foxconn has previously highlighted, as it tries to restart factory production with many staff failing to turn up for work.
Aside from the coronavirus, the UK once again represents something of a special case for the wrong reasons. Despite the resolution of the political deadlock following the election last year, investors’ relief in respect of Brexit has given way to fears of a no-deal outcome by December 2020. The rhetoric between the UK and EU has at times been close to hostile. This has had a negative impact on both sterling and consensus earnings forecasts. 2020 UK estimates have continued to fall in the first 6 weeks of 2020 and now indicate just 5% growth for the year, compared to 8-9% for the US and continental Europe. UK PM Johnson’s new Conservative government has for now disappointed those hoping for strategic policymaking, even as it carries the cost of a more confrontational approach. Both domestic and foreign policy has instead looked almost chaotic, impacting investor confidence in the process.
We believe that markets are underplaying the risk of a rise in coronavirus related pneumonia in nations outside China and the impact of resulting control measures. We acknowledge this scenario which has not materialised to date, as for now sustained human-to-human transmission appears to be confined to China and a quarantined cruise ship. Yet equity markets continue to trade at the high end of their forward valuation ranges in the US and continental Europe and we believe patience in 2020 will be rewarded. Notably, a dash for government bonds, which remain at their yield lows for the year, and precious metals suggest at least some investors are seeking protection from a decline in global growth expectations.