Fears about the negative economic impact of the coronavirus sent global equity markets into a tailspin last week, with prices plunging more than 10%. Nevertheless, Danske Bank’s chief strategist, Henrik Drusebjerg, expects the negative effects will be temporary.

“Until the coronavirus erupted across our news screens, the economy was showing signs of stabilisation after a period of weak indicators and outright recession fears in 2019. And while the virus will doubtless hit growth for a time, we expect a pronounced recovery in activity and a further stabilisation of the economy once we get through the crisis. We are expecting a decent return from equities over the coming 12 months, though further market volatility is on the cards in the shorter term,” he says.

Positive factors for the economy
Among the positive factors for the global economy, Henrik Drusebjerg mentions declining fears of an escalation in the trade war between the US and China, which previously weighed heavily on business sentiment. In addition, robust labour markets, rising wages and low interest rates are helping to ensure solid private consumption, though the coronavirus could cause some consumers to stay at home and so curtail spending for a while.

“Other important factors are limited inflation and moderate economic growth. These factors continue to provide central banks with the leeway to support the economy through accommodative monetary policy – i.e. low interest rates and bond purchases – without fear of the economy overheating or runaway inflation,” explains Henrik Drusebjerg.

Need for economic stimulation 
The recent spread of the virus to other parts of the world has increased the risk that we will experience a longer period of slowing economic growth than previously assumed. According to the chief strategist, this will increase the need for the authorities, including the central banks, to do their bit to stimulate the economy in the meantime.

“We have already seen the authorities take action in China, while the US central bank announced on Friday it would act to support the economy via monetary policy easing,” says Henrik Drusebjerg.

Maintaining our overweight in equities 
Despite the current market turmoil, we at Danske Bank are maintaining a slight overweight in equities – in other words, we continue to have slightly more equities in our portfolios than we expect to have in the long term, and likewise fewer bonds.
Part of the overall picture is also that bonds still offer very modest expected returns due to the low level of interest rates.

“We generally continue to assess equities as the best alternative for investors in the current low interest rate environment. Hence, despite the current turbulence we still expect to see a solid underlying demand for equities once the worst turmoil has eased,” says Henrik Drusebjerg.

Nevertheless, recent developments in the financial markets have underlined the value of having bonds in a portfolio. While equity prices have been falling, investors have sought a safe haven in the most secure bonds, such as Danish, German and US government bonds, which have risen in price and thus contributed to reducing losses in a mixed portfolio of investments.

This content is not investment advice - you should always speak to an advisor about how a possible investment matches your investment profile before making an investment.