Charles Stanley is assuming “much weaker” growth at the start of the year due to the impact of the coronavirus and is bracing for a worst case scenario of a “prolonged period” of economic activity shutdown.
Chief global strategist John Redwood (pictured) said the wealth manager had modified its outlook for global markets in 2020 in light of the economic fallout from the coronavirus which he said, “has mounted a substantial attack on world trade”.
“Our base case still assumes modest growth for the year as a whole but includes a much weaker first quarter and a possible recovery during the second quarter,” Redwood said in a market update.
“It has to embrace the fact that many companies will have to report lower earnings, and some will experience cashflow difficulties all the time reduced working persists.”
Worst case ‘supply shock’ would highlight valuation gap
Redwood said the firm’s worst case scenario now includes a “prolonged period” of the virus spreading throughout many countries which triggers more government shutdowns of economic activity and industries to contain the epidemic.
“As more consumers and employees stay at home so they produce less and only spend on food, utilities and in-home entertainments,” he said.
“This kind of supply shock will be damaging to output and company profitability and highlight the gap between stock market valuations and the reality of company results.”
Redwood, who is also the Conservative MP for Wokingham and a vocal Eurosceptic, has predicted the world economy would continue growing at a modest pace as governments and central banks do everything they can to stave off recession.
But he said with the impact on output and confidence following the virus outbreak Charles Stanley had to factor in the possibility of an “actual recession” in countries like Japan as well as a “sharp reduction in Chinese activity” for as long as offices and factories remain closed.
Diversifying away from Chinese manufacturing dominance
One silver lining of the supply chain disruption caused by Covid-19 is that it is forcing companies to take stock of where they get their raw materials from and suss out if there are alternatives that are closer to home, Redwood said.
“The world has become very dependent on Chinese manufacture in many areas. The West has lived through a couple of decades when it has relied more and more on good value manufactures out of China at the expense of its own industrial production. Suddenly the source of all that product has wobbled, revealing to more people just how dominant they have become.”
Ultimately Redwood thinks diversifying away from Chinese manufacturing dominance will be a good thing.
“This is exactly what Mr Trump wants as he seeks to onshore business to the USA,” he said.
“There is a danger from excessive specialisation when that produces concentration. This in turn can lead to cartel or monopoly pricing once enough of the world competitors are driven out of the market.”
