Pedestrians in Milan, Italy,where the coronavirus is spreading. (Photo: FrancescaVolpi/Bloomberg)

As the coronavirus has spread more widely out of China,investors have taken note. At the market open on Monday, the threemajor U.S. stock benchmarks slumped 3 percent lower. Meanwhile,U.S. bond yields are plunging, with the 10-year note at 1.36percent, its lowest yield since 2016, and the 30-year Treasury at1.82 percent, a record low.

And the long-term impact of the virus may be greater thanthought, Bob Browne, chief investment officer of Northern Trust,told ThinkAdvisor. "We think it's premature to assume [thevirus] is a blip" in global markets, he said.

He explained that some geopolitical events, such as the U.S.assassination of the Iranian general Qasem Soleimani, can passthrough the public view quickly, especially when starting with asound economy and bullish market. "But [the virus] is differentbecause it's affecting the second-largest economy in the world," hesays. This means it's affecting global tourism, which is 10 percentof the world's gross domestic product (GDP). Downstream, thataffects casinos, airlines, and cruise ships, as well assuppliers.

And the greater a firm's ties to China, the higher the risk.This includes Apple, which has 17 percent of its sales in China andsignificant manufacturing there. The company announced inmid-February that it would fall short of quarterly revenueexpectations due to the virus.

But for the most part, U.S. stocks seem somewhat fenced off,especially the other big tech firms such as Amazon, Google, andFacebook. This is one reason Northern Trust added 3 percent to itsoverweight stance in U.S. stocks, moving some investments fromemerging markets and developed markets outside the UnitedStates.

Also changing, especially now, will be globalcompanies—including those in China—redistributing supply chains tonot have "the proverbial eggs in one basket," Browne says.

See also:

• The Finance Leader's Guide to Preparing for anEconomic Downturn
• The Fragility of Global Supply Chains
• Companies Are Moving Supply Chains fromChina

A second part of the 2020 outlook is determining the"irreconcilable differences" between China and the United States."This is not simply a Trump administration phenomenon. It's aresetting of the relationship that is not going back to where itused to be," he says. "At best, we will achieve an equilibrium ofeach country viewing the other as a strategic competitor. And theworst-case scenario is they view themselves as strategic threats toone another. … It's a multiyear process that will sway back andforth. But we're not strategic allies; that's been revealed. Andwe're not cooperative trading partners."

2020 Election Shifts

Another factor—who will be the Democratic presidentialnominee—will affect the stock market. "There's probably going to bea pretty significant shift in asset prices and flows as people tryto game out who [asset-wise] the winners and losers will be of apotential Sanders presidency," Browne says.Until then it will continue to be a volatile market, he says,adding that "it's really risky to be prematurely bearish."

What's key are market fundamentals, which overall are "OK," hesays. "We see 2 percent growth, have low [interest] rates," hesays. "I want to clarify that the key theme for us is: It'sfundamentals versus geopolitical risk. We're betting onfundamentals the first half of the year. The second half, that maybe a harder bet to make."

Overall, Northern Trust likes credit, including high-yield bonds, of which it is overweight.Why? "We're not forecasting a recession … and we think rates willremain low, so debt servicing costs remain low. [Also] a lot ofcompanies that are issuing debt are doing it for capital structureoptimization reasons, which may come back to haunt them in arecession, but they're not being downgraded because of a weakenvironment or poor fundamentals."

A renewed interest in tightening by the Federal Reserve couldcatch them off guard, he says, but he sees that as lowprobability.

From: ThinkAdvisor