The Global Stock Market Outlook Is Still Positive.

Clive McDonnell, head of stock investment strategy, wealth management division, Standard Chartered Bank

Negative reports about the impact of the new crown pneumonia on the global economy are overwhelming and investors are overwhelmed. However, the global stock market is still steady under the leadership of the US market. At the same time, government bonds are also benefited by the liquidity injected by central banks to the market.

China's stock market suffered more serious shocks earlier because investors worried that the epidemic would have a negative impact on economic growth and corporate profits. Nonetheless, looking back at the SARS epidemic in 2003, we found that although the epidemic would cause death, the long-term impact on the company's profits was limited, and the output of the season would be resumed in the subsequent quarter.

We remain optimistic about the stock market. There are four reasons why investors are optimistic about our optimistic stock market, especially in the US and eurozone.

Corporate profits: US companies made far more profits than they expected in the fourth quarter of last year. The consensus in the market is expected to be 1% year-on-year decline in the 4 quarter of last year, while the consensus is expected to grow by 2%. The US technology industry as a leader is eye-catching, and 90% of technology companies made higher than expected profits in the fourth quarter of last year. In addition, the performance of semiconductor, hardware and business related to cloud services is remarkable.

Liquidity: the Federal Reserve has been expanding its balance sheet since October 2019 and buying $60 billion of treasury bonds a month. Although there are doubts about the specific effect of inject capital into the market and whether this practice can really increase stock liquidity in the financial system, Robert Kaplan, chairman of the Dallas Federal Reserve, called Robert Kaplan a "quantitative easing derivative". Aside from the academic debate, the purpose of the US Federal Reserve's purchase of treasury bonds is to increase the liquidity of the financial system. The positive impact of this approach on asset prices is equivalent to the PBC's liquidity injection into the market after the Spring Festival of February 3rd and the opening of the market. The latter helped avoid liquidity runs and stabilized asset prices after the first day of the opening.

Rate of return on Capital: the European banking regulator announced in December 2019 that the banking industry had accumulated sufficient capital to meet the provisions of the Basel agreement four and the capital requirement directive. This means that European banks can start returning excess capital to shareholders, and the US banking industry has been doing this since 2018.

Trade uncertainty has been lowered: the first stage trade agreement between China and the United States has removed fears of further escalation of trade wars. The trade war has damaged the global manufacturing industry and has had an impact on business investment plans. This uncertainty has dragged down the export oriented economies of Europe (especially Germany) and Asia. With the decline in major risks, global business confidence indicators, especially manufacturing related indicators, have begun to recover in recent months.

Pessimistic investors believe that since the US stock market has gone through ten years of rising and valuations are high, if the new crown pneumonia epidemic is spreading all over the world, it may push the bull market to an end. Although the new crown pneumonia epidemic is undoubtedly a major concern that needs close attention, the long duration of the bull market does not mean that it is about to end, and the valuation of US stocks has been higher than it is now.

Of course, while we are optimistic about the medium-term performance of the stock market, we still need to be aware of the following risks associated with the new crown pneumonia outbreak:

First, China's economic growth rate will inevitably slow down in the first quarter of this year. How will it affect the recovery of European economy and corporate earnings? After the signing of the first stage trade agreement between China and the US, European stocks were boosted. But the spread of the new crown pneumonia epidemic has led to a slowdown in stock demand growth, which may overshadow the positive impact of the Sino US trade agreement.

Second, the expectation that the impact of the epidemic will end in March may be too optimistic, which may change the optimism of investors.

Third, there are some uncertainties about the extension of China's factory downtime and its impact on the global supply chain. Many Chinese companies say they plan to recall workers from mid February. If the delay is resumed, its impact on the global supply chain and corporate profits may exceed the current expectations.

Although the news about the new crown pneumonia epidemic occupied the headlines of the recent media and became the main risk that affected the market prospect, we still need to consider all kinds of factors when making the asset allocation decision. We believe that the fundamental factors supporting the bull market in the US, namely, the two digit growth of corporate profits, low bond yields and large-scale stock repurchase activities, are still playing a positive role, which has led us to decide to continue to give the global stock overmatching rating, and favour the US and euro area stocks.

?