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European equities haven’t had such a bad day since the aftermath of the Brexit vote more than three years ago, as increasing concerns over the economic impact of the coronavirus hurt travel and luxury sectors, and volatility spiked.
The Stoxx Europe 600 Index closed down 3.8% after falling as much as 4.2% in the sharpest drop since June 27, 2016, led by the travel, mining and auto sectors. Today’s move also wiped out the year-to-date gains for the Stoxx 600. The Euro Stoxx 50 Volatility Index surged as much as 49%, the most since the so-called “Volmageddon” of February 2018 -- when Wall Street was rocked by a surge in volatility and a sell-off in stocks.
Luxury companies tumbled on fears that the epidemic will hurt sales, with LVMH Moet Hennessy Louis Vuitton SE losing 4.7% and Roche Holding AG dropping 3.2%. The Stoxx 600 Travel and Leisure Index fell 6%, with Air France-KLM declining 8.7%, EasyJet Plc tumbling 17% and Ryanair Holdings Plc losing 14%.
“We believe the coronavirus illness will substantially curtail store traffic in China and neighboring countries, may negatively affect incoming Chinese tourism, and is also likely to disrupt supply chains,” Oliver Chen, a retail analyst at Cowen & Co., wrote in a report on Monday.
Money managers are selling stocks and looking for havens after South Korea saw a surge in cases to 763 and the concern about a jump in illnesses in Italy intensified. European equities advanced to a fresh record high last week, which is adding to investor anxiety about possibly stretched positioning and valuations.
“Markets are in a risk-off mode amid concerns about the global spread of coronavirus, with a growing number of infections outside of China,” said Ulrich Urbahn, head of multi-asset strategy and research at Joh Berenberg Gossler & Co., which recently cut its exposure to commodities and favors quality European stocks. “Given the strong performance and elevated positioning in equities, the risks are clearly skewed to the downside.”
The impact from China’s slowdown due to the coronavirus as well as supply, sales and production disruptions at major firms such as Apple Inc., are a major concern for asset managers. European equities are particularly sensitive as Goldman Sachs Group Inc. says the exposure of the Euro Stoxx 50 Index to China is about twice that of the S&P 500 due to such sectors as banks, automakers and luxury shares.
Italy’s FTSE MIB Index led the declines among major European benchmarks, retreating as much as 6.1%, the most since June 2016, after Europe’s biggest surge of the coronavirus prompted the government to impose a lockdown on an area of 50,000 people near Milan, and authorities canceled the remaining days of the Venice Carnival, while universities closed. Some of the biggest Italian companies - from banks to luxury firms - were battered. Salvatore Ferragamo SpA declined as much as 10% and Juventus Football Club SpA lost as much as 12%.
Goldman’s chief global equity strategist Peter Oppenheimer said last week that a 1% drop in global sales-weighted gross domestic product would cut European earnings by about 10%, turning them negative.
The US stock market extended the global slump, with the S&P 500 falling as much as 3.2% and the Nasdaq 100 losing up to 4.4%.
However, continuous monetary easing by major global central banks and China’s efforts to support its economy are making some investors optimistic that the sell-off in risk assets won’t last for long. The London-based wealth manager Kingswood is currently neutral on stocks and looking to increase equity positions in case of a significant market correction.
“The disruption caused by the virus will hit economic activity significantly in the first quarter, with global growth very likely to grind to a halt,” said Rupert Thompson, chief investment officer at Kingswood, which has about £2.5 billion pounds under management. “But we continue to believe that the outbreak is likely to follow the path of previous such health scares with growth rebounding in the second and third quarters.”
