In the age of the virus, all market predictions are off

Investors need to be wary of any calls to buy at the dip

The steep sell-off in stocks related to the coronavirus has intensified focus on the financial implications of the outbreak. Much of the narrative, especially when it comes to economists and market pundits as opposed to companies, has yet to internalise the significant uncertainties concerning both the known knowns and the known unknowns.

As the virus has spread into several countries and brought more sudden economic stops, it has become even harder to ignore the mounting damage to conditions on the ground, let alone the funding challenges that lie ahead for some of the more financially stressed companies in China.

No wonder when I look at the year as a whole I find it hard to predict not only how and when demand will recover but also how well-functioning supply chains will be restored. I am also concerned about the financial outlook of highly leveraged companies and countries, as well as the big overhang of triple-B rated companies over the high-yield market.

Companies appear to have internalised these uncertainties better than economists and markets. All of that leads to me to continue to question the latter’s comforting notion of a rapid Vshaped recovery as opposed to a U-, W- or L-shaped one.

Issues

Short-term questions include how the virus will be contained, the process for overcoming the damaging sudden economic stops and the extent to which stressed balance-sheets will be supported by others. For markets, the chief question is whether the supply-and-demand shock emanating from China is big enough to shake the faith in central banks and change the deep FOMO/buythe-dip conditioning. (FOMO is for “fear of missing out”.)

The longer-term issues are even more complex. Will the shock to China derail what has been an unprecedented development process? What will happen to the China brand? Will the immediate disruption fuel a multi-year deglobalisation?

The hope remains that the coronavirus will be contained quickly and that the cascading sudden economic stops can be reversed rapidly. Even before that happens for sure, the time will come to buy risk assets.

But there simply isn’t enough evidence at this stage to predict a timetable with any degree of confidence. After all, it is rare for a sudden stop to break out in some of the largest economies in the world. There is still much more unknown than known.