- Scott Minerd, global chief investment officer at $270 billion Guggenheim Investments, thinks market participants are underestimating the impact the coronavirus will have on global growth due to misrepresented calculations.
- He points to tight credit spreads, low yields, and assets that are “priced to perfection” to further his thesis.
- Minerd says “this will eventually end badly” and that he’s never “seen anything as crazy as what’s going on right now.”
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Fears over the coronavirus’ severity have been ebbing and flowing in lockstep with market sentiment. As worries subside, markets rally. As they increase, markets fade.
“In the markets today, yields are low, spreads are tight, and risk assets are priced to perfection, but everywhere you look there are red flags,” said Scott Minerd, global chief investment officer at $270 billion Guggenheim Investments. “The latest red flag is the coronavirus.”
He continued: “Many experts are confident that as bad as the numbers are, the Chinese are underreporting.”
The chart below — compiled by Minerd and his team — compares the timeline of number of confirmed coronavirus cases versus that of SARS. It’s clear that the coronavirus’ prevalence has grown exponentially faster.
Guggenheim Investments, China National Health Commission, Wind. Data as of 2.12.2020.
Minerd thinks the media is misrepresenting coronavirus death rates, which is causing many investors to underestimate its influence on growth.
“The impact of all this on corporate profits and free cash flow will be dramatic,” he said. “The effect on oil and energy prices could be even more extreme.”
He continued: “Our estimate is that China’s GDP growth for the first quarter could be slashed to -6% annualized from an already slow 6% in the fourth quarter. That could shave about 200 basis points off of global growth relative to its recent trend.”
To further demonstrate his thinking and highlight the market’s complacency, Minerd points to pricing action in corporate bonds, a classic gauge for investor risk appetite. When spreads are tight, it’s generally a risk-on environment. When spreads are blown out, it’s risk-off.
The chart below depicts high-yield bond spreads starting from 1997. Minerd notes the lackadaisical response in the bond market. If investors were truly concerned, spreads would be wider. In essence, those traders are scooping up risky securities in a market already fraught with risk.
Guggenheim Investments, Bloomberg. Data as of 2.10.2020.
“The cognitive dissonance in the credit market is stunning,” he said. “This will eventually end badly. I have never in my career seen anything as crazy as what’s going on right now.”
What’s more, Minerd notes that many investors are purchasing bonds via exchange-traded funds where rate or price negotiation is negligible. He says this is further distorting pricing and adding to an already sticky situation.
Against that backdrop, he delivers a blunt observation:
“We are either moving into a completely new paradigm, or the speculative energy in the market is incredibly out of control,” he concluded. “The coronavirus is just one example of exogenous events that could prick the bubble.”
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