- Traders are raising their bets on central bank rate cuts as the number of coronavirus deaths increases, but such a policy won't do much for equity markets, said Seema Shah, chief investment strategist at Principal Global Investors, on Monday.
- Interest rate cuts primarily strengthen borrowing and thus demand. Such a policy will not isolate the markets "against supply side concerns," Shah wrote in an emailed statement.
- Investors should focus on protecting their portfolios and avoid buying stocks at lower prices, as the markets have already shown "over-satisfied" behavior towards coronavirus messages.
- Shah advised investors to watch European companies for profit warnings as the export-intensive economy is at great risk from a slowdown in manufacturing.
- You can find more stories on the Business Insider homepage.
Investors looking to buy stocks during Monday's slump shouldn't expect much help from central bank policy, said Seema Shah, chief investment strategist at Principal Global Investors, on Monday.
Traders are raising their bets on rate cuts by central banks as the coronavirus fears the roil markets. Lower interest rates bring cheaper loans, and cheaper loans often bring higher expenses. According to Bloomberg, investors are betting on two Federal Reserve rate cuts in 2020, but Shah doesn't believe that such measures would provide the cushion the markets are looking for.
Rate cuts could boost demand slightly, but the impact of coronavirus on global supply chains is not easily averted and can lower share prices, the strategist said. Apple warned on February 17 that next quarter sales will be below original forecasts as the "temporarily limited" iPhone supply and weak demand in China weighed on sales. Other companies, including Tesla, Starbucks and Nike, have alerted investors to the profit risk associated with the outbreak.
The market has just learned that rate cuts don't "protect against supply-side concerns" and drive stocks up, Shah said in emailed comments.
"While further cuts by the Fed and possibly a cut by the ECB could be priced in, simpler liquidity conditions might not be enough to support equity markets as concerns about the corona virus continue to escalate," she wrote. "Monetary policy is not optimized to deal with such a shock."
Global stocks fell in Monday's trading session after an increase in virus-related deaths outside of China sparked new fears that the outbreak could affect global growth. Investors flocked to safe havens, drove gold close to $ 1,700 an ounce, and pushed 10-year government bond yields to all-time low.
Some analysts saw Monday's decline as a prime buying opportunity before the record-breaking bull run resumes. US stock prices were at record highs last week and were already rising after investors shook off reports of the severity of the virus. The "overly complacent" reaction in early February should motivate investors to take defensive positions before another slump, said Shah.
"Given these overvaluations and the vulnerability of the market to negative news flows related to the outbreak, investors should try to protect their portfolios and resist the urge to buy the dip," wrote the strategist.
Shah advises investors to watch out for new profit warnings in Europe to signal the next move in the markets. The continent's risk asset ratings "may have peaked," said the strategist. The European economy is heavily dependent on export activity and the entire stock market is at risk if the corona virus affects production, Shah said.
Principal Global Investors manages $ 476.4 billion in assets.
The S & P 500 fell 2.7% from 3.15 p.m. ET Monday.
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