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Causeway Capital Commentary: The Search for the Bottom

Amid the market panic over coronavirus, China, which accounts for more than 35% of the MSCI Emerging Markets Index, has notably outperformed other emerging and developed markets in 2020 (through March 18). We currently believe China is ahead of other countries in COVID-19 virus containment, and the government is deploying significant monetary and fiscal stimulus to cushion the economic impact.


China may also provide a useful guide in the search for a market bottom in developed equity markets.

Key insights

  • It is encouraging that many developed market countries have now realized that China-style "lockdown" initiatives have worked well at slowing the spread of the virus.
  • We currently expect new European cases to peak in approximately three weeks, and new US cases to peak in three to four weeks (by mid-April) assuming their lockdown procedures are effective.
  • Stock markets have typically anticipated economic recovery well before the upturn in gross domestic product growth, and should, based on our experience, improve coincident with the peak of the virus outbreak.



As the chart below demonstrates, the Shanghai Composite reached a year-to-date (YTD) trough on February 3, the same day it reported the highest number of new cases outside of Hubei province. The Chinese market behaved very similarly during the SARS outbreak in 2003, with stocks rallying once new cases peaked.

Chart: The Shanghai Composite hit a YTD trough the same day new COVID-19 cases peaked.

It is encouraging that many developed market countries have now realized that China-style "lockdown" initiatives have worked well at slowing the spread of the virus. Based on our analysis of virus growth rates by country, we observe that early on, new COVID-19 cases (a leading indicator for total cases) initially grew faster than exponential growth rates. Isolation measures have shown the ability to slow the rate of new cases below exponential growth, at which point a peak in new cases is close at hand, and the total number of confirmed cases can be fairly accurately modeled.

Cases in China (outside of Hubei province) peaked 10 days after China's lockdown began. In Europe, Italy began an initial lockdown on March 10 and is likely to adjust measures to further increase social distancing; France and Spain started lockdowns on March 14; Germany adopted lockdown measures March 18; and the UK is likely to adopt similar requirements within the next few days. In the US, seven San Francisco Bay-area counties have already initiated lockdown procedures ("shelter-in-place"), and other metropolitan areas are likely to follow shortly. Based on these timelines, we currently expect new European cases to peak in approximately three weeks, and new US cases to peak in three to four weeks (by mid-April) assuming their lockdown procedures are effective. On the date of writing (3/18/2020), it is instructive to note that equity markets in China, Italy, and Spain outperformed most other global equity markets. This is likely partially attributable to those countries' positions further along the virus growth curve, where new cases have either peaked or appear likely to peak in the near future.

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This article first appeared on GuruFocus.