Pedestrians in Milan, Italy, where the coronavirus is spreading. (Photo: Francesca Volpi/Bloomberg)

As the coronavirus has spread more widely out of China, investors have taken note. At the market open on Monday, the three major U.S. stock benchmarks slumped 3% lower. Meanwhile, U.S. bond yields are plunging with the 10-year note at 1.36%, its lowest yield since 2016, and the 30-year Treasury at 1.82%, a record low.

And the long-term impact of the virus may be greater than thought, Bob Browne, chief investment officer of Northern Trust, told ThinkAdvisor. “We think it’s premature to assume [the virus] is a blip” in global markets, he said.

He explained that some geopolitical events, such as the U.S. assassination of the Iranian general Qasem Soleimani, can pass through the public view quickly, especially when starting with a sound economy and bullish market. “But [the virus] is different because it’s affecting the second largest economy in the world,” he says. This means it’s affecting global tourism, which is 10% of world GDP, and downstream that affects casinos, airlines and cruise ships as well as suppliers.

And the greater a firm’s ties to China, the higher the risk. This includes Apple, which has 17% of its sales in China and significant manufacturing there. The company announced in mid-February that it would fall short of quarterly revenue expectations due to the virus.

But for the most part, U.S. stocks seem somewhat fenced off, especially the other big tech firms such as Amazon, Google and Facebook. This is one reason Northern Trust added 3% to its overweight stance in U.S. stocks, moving some investments from emerging markets and developed markets outside the U.S.

Also changing, especially now, will be global companies — including those in China — redistributing supply chains to not have “the proverbial eggs in one basket,” Browne says.

A second part of the 2020 outlook is determining the “irreconcilable differences” between China and the United States. “This is not simply a Trump administration phenomenon. It’s a resetting of the relationship that is not going back to where it used to be,” he says. “At best we will achieve an equilibrium of each country viewing the other as a strategic competitor. And the worst-case scenario is they view themselves as strategic threats to one another. … It’s a multi-year process that will sway back and forth. But we’re not strategic allies, that’s been revealed. And we’re not cooperative trading partners.”

2020 Election Shifts

Another factor — who will be the Democratic presidential nominee — will affect the stock market. “There’s probably going to be a pretty significant shift in asset prices and flows as people try to game out who [asset wise] the winners and losers will be of a potential Sanders presidency,” he says. Until then it will continue to be a volatile market, he says, adding that “it’s really risky to be prematurely bearish.”

What’s key are market fundamentals, which overall are “OK,” he says. “We see 2% growth, have low [interest] rates,” he says. “I want to clarify that the key theme for us is it’s fundamentals versus geopolitical risk. We’re betting on fundamentals the first half of the year. The second half, that may be a harder bet to make.”

Overall, Northern Trust likes credit, including high-yield bonds, of which it is overweight. Why? “We’re not forecasting a recession … and we think rates will remain low so debt servicing costs remain low. [Also] a lot of companies that are issuing debt are doing it for capital structure optimization reasons, which may come back to haunt them in a recession, but they’re not being downgraded because of a weak environment or poor fundamentals.”

A renewed interest in tightening by the Federal Reserve could catch them off guard, he says, but he sees that as low probability.

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