According to China’s vice-chair of the National Institute for Finance and Development, Zeng Gang, the outbreak of the coronavirus could impact the full-year growth rate in China by as much as 1 percent in 2020. He also compared the current virus to the SARS outbreak in 2003. That outbreak knocked about 2 percent off of China’s growth in a single quarter. ‘The impact of this epidemic on the economy in the first quarter is expected to be comparable’ he said, adding ‘At present, according to different scenario assumptions, researchers expect the negative impact of the epidemic on full-year GDP growth to be in the range of 0.2% to 1%’. He acknowledged that this time around, the Chinese authorities had been much more aggressive in trying to limit the spread of this virus, however still believed ‘in the short term, the epidemic’s impact on economic activity cannot be ignored, especially with tertiary industries and small enterprises with tight cash flows facing greater pressures’.
Zeng Gang's comments follow that of Chinese President Xi Jinping yesterday who said on state television that the government would prevent large-scale layoffs resulting from the virus. Yesterday was significant because the extended Lunar New Year ended, however many businesses remained closed as the virus took hold. During his statement, the President also said that China will continually strive to meet its economic and social targets for the year and make economic adjustments to minimise the impact of the virus.
Also, we noticed at the end of last week that Turkey joined the growing group of nations looking to benefit from a renewed appetite for risk and favourable borrowing cost when it offered two USD government bonds, its first issuance of the year. The two bonds, a 5-year and a 10-year, at first looked like they were going to be well received by the market. The 5-year was launched at +297.8 bps and the 10-year +384.5, for a country that is 4 credit notches below investment grade according to S&P. The books, so the leads say, (always to be taken with a pinch of salt), were about 3x oversubscribed with supposedly more than 200 investors involved. However, it now looks like several of the bigger accounts passed on the deal, feeling that valuations were no longer as attractive after the recent rally. This, in turn, led to more generous allocations to accounts than had been expected. Given this, plus the ongoing spat between Syria and Turkey, has led to a sellers only market. At the time of writing, the 5-year was 50 bps wider with the 10-year slightly less. As we see it, it’s hard to see a situation where they don't go weaker from here, even if short term, and to many, we are still a long way from any kind of value.
To us, the words touch and barge pole come to mind.