When the playbook stops working

Paras Anand, CIO Asset Management Asia Pacific at Fidelity, analyses the coronavirus market sell off. He assesses what happens next and outlines why the traditional playbook response from policymakers might not be quite so effective this time around.

The recent broad sell-off in risk assets was surprising not for the fact it occurred, but rather for how long it took to materialise after the coronavirus outbreak. Paras Anand, CIO Asset Management Asia Pacific, looks at what happens next and outlines why the traditional playbook response from policymakers might not be quite so effective this time around.

Key points

  • The recent sell-off in markets was surprising in how long it took to occur since the outbreak of coronavirus.
  • If we compare the market reaction to that of SARS in 2003 and H1N1 swine flu in 2009, we can see key differences in investor mindsets.
  • The previously successful playbook used by global policymakers to provide liquidity in these scenarios may have stopped working. 

The recent sell-off in markets has been surprising. Not because of the scale of the decline, but because it was such a long time coming.

The efforts to contain the spread of coronavirus have arguably been more determined and disruptive than we have seen in previous analogues (SARS in 2003, H1N1 swine flu in 2009). The impact this time has been especially pronounced given China’s growing role over the last decade in global supply chains and the world economy overall.

In this context, the interesting question is not why markets were suddenly weak but why, with such a clear impact on economic output and corporate earnings, they were so sanguine leading up to the market falls.

Why this time is different

It seems that investors were more focused on two other factors. First, many clearly believe the lesson from previous health emergencies is that markets will end higher after a period of initial volatility. While that was true for both SARS and H1N1, a key difference is that those outbreaks occurred shortly after significant equity bear markets - i.e. the unwinding of the internet bubble and then in the wake of the global financial crisis.

By contrast, today we remain in - or are at the tail-end of - one of the longest bull markets in history. The second factor is that a deteriorating outlook for corporate earnings has made investors into ‘contrarian optimists’. The hopeful thinking here is that that governments and central banks will continue to provide liquidity, first to mitigate the economic impact, but also quite specifically to support asset prices in the short-term. Again, this is a playbook that global policymakers have used successfully over recent years: when weighing a choice between faltering economic demand or the provision of liquidity, go for the latter!

However, repeated use of this playbook means that, in many parts of the market, valuations have already been pushed ahead of underlying fundamentals. I have argued over recent months that a pullback in markets was in prospect. While we feel that this could represent a buying opportunity, especially in Asia and emerging markets, investors would also do well to recognise that this recent weakness may have a way to run - particularly if that well-worn playbook has just stopped working.

Related content

Coronavirus: the impact on the global economy and markets

Understanding market volatility


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