- US equities could fall another 11% from March 3 levels, according to a recent analysis from MSCI.
- MSCI’s model assumes that short-term growth drops 2% while equity risk premium increases 2% in response to heightened uncertainty from the coronavirus outbreak.
- A typical multi-asset global portfolio with 60% stocks and 40% bonds could lose another 7%, according to the report.
- Read more on Business Insider.
If the coronavirus outbreak continues to spread and hammer global growth, US equities could fall into a bear market according to MSCI.
An analysis released Thursday from MSCI shows that US equities could fall another 11% from March 3 in the short-term if coronavirus continues to halt global growth. Given that major US indexes have already fallen more than 10% into a correction on coronavirus fears, additional double-digit declines would spell the end of the nearly 12-year bull market.
“As uncertainty increases over future growth, investors may turn more risk-averse and demand a higher premium to compensate them for the additional risk they are taking on,” an MSCI team led by Thomas Verbraken, executive director of Risk Management Solutions Research, said in a Thursday note.
He added: “If they do so, they would discount future earnings more aggressively and lower companies’ valuations, affecting market prices.”
As COVID-19 — the illness caused by the coronavirus that originated in Wuhan, China — has spread globally, markets around the world have gone into a tailspin. Panicked investors have sent stocks tumbling and pushed US Treasury bond yields to record lows as they pile into the safe-haven assets. Bond prices are inverse to yields.
There have been many calls for slowed growth going forward. The Organization for Economic Cooperation and Development on Monday said the virus had put the world economy in its most “precarious position” since the 2008 financial crisis. The next day, the Federal Reserve issued an emergency 50-basis-point rate cut in an effort to protect the US economy from the impact of an outbreak.
MSCI’s model assumes that short-term growth drops 2 percentage points, while the equity risk premium increases the same amount in response to heightened uncertainty. The model also assumes that the 10-year Treasury yield could drop by an additional 90 basis points, US investment-grade credit spreads could widen by 60 basis points, and high-yield credit spreads could widen by 200 basis points.
If that were to happen, a typical global multi-asset-class portfolio consisting of 60% stocks and 40% bonds could lose another 7% from March 3 on, according to MSCI’s model. Global equities could shed more than 10%, which would be partially offset by a 2% gain in Treasury bonds.
The total impact of the coronavirus outbreak on markets and the economy will depend on if it delivers a short-term or long-term shock, or both, according to the report.
“If the global economy suffers only short-term pain, the market could bounce back once the shockwave of uncertainty dissipates,” wrote Verbraken.
But, if long-term growth and corporate earnings take a lower trajectory because of a pandemic, “the market impact could be felt over a much longer horizon,” he said.