Patrik Schowitz

Here’s what will help financial markets battle impact of the coronavirus outbreak: a return of corporate earnings growth

After a spectacular 2019, markets could rise modestly in 2020 on the back of stabilising profit margins amid recovering economic growth. The reporting season now under way will set the tone for markets

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People walk by an electronic stock board of a securities firm in Tokyo on January 27. Shares tumbled in the few Asian markets open as China announced sharp increases in the number of people affected by an outbreak of a new coronavirus. Photo: AP

Patrik Schowitz

Published: 1:00am, 1 Feb 2020Updated: 2:29am, 1 Feb 2020

After a very strong start to the year, global equity markets have come under pressure in light of the coronavirus outbreak. But even so, markets have been holding up relatively well, with the global equity market still in positive territory for the year, and even the more affected Asia-Pacific equity region down only slightly at the time of writing.

This comes hot on the heels of a spectacular 2019, which saw global equities rally by nearly a quarter and Asia ex-Japan by around 15 per cent. Markets can probably keep rising modestly in 2020, but this will require a return of corporate earnings growth, which was notable by its nearly total absence in 2019, with global profits growing by just 0.5 per cent.

Two forces weighed on earnings: slowing corporate top-line growth in combination with the slowdown in the economic cycle, and; falling profit margins, driven by a mix of cost pressures and operational gearing.

In 2019, stock market prices rose despite anaemic earnings growth. This was driven by a rise in valuations that happened in two stages. The strong rise in global price/earnings (P/E) multiples between January and April added some 15 per cent to equity returns, and mostly represented a recovery from the late 2018 equity sell-off.

Between April and October, P/E multiples and equity markets went nowhere as uncertainty around the economic outlook persisted.