The outbreak of the coronavirus continues to spread. Initial profit warnings from companies confirm our fears that the partial closure of the Chinese economy will have significant economic consequences worldwide.

These risks, which we emphasized last Friday in our Investment Compass, have intensified further. The recent course of the coronavirus epidemic makes it clear that major economic restrictions are also to be expected in economies outside China. At present, South Korea and Italy are the main candidates, but there is still a risk that other countries will also be affected.

The risk of a recession in the global economy has therefore increased further. Further drastic measures by governments and uncertainty among companies and consumers could lead to lower investments and a lack of consumption. The longer the uncertainties persist, the greater the risk that companies that are already heavily indebted will run into serious difficulties. 

Further reduction of portfolio risks

In January, we had slightly reduced equity positions in the portfolios entrusted to us due to the outbreak of the coronavirus in China. The collapse in global equity markets at the beginning of the week showed that this cautious stance is justified.

In light of recent developments, we are now undertaking a further risk reduction in our portfolios. On the one hand, we are lowering our equity exposure by slightly reducing our exposure to emerging markets and Europe. With a significant proportion of industrial companies with globally integrated production chains, these equity markets are particularly vulnerable.

On the other hand, we reduce the portfolio risk by building up safe investments. In the course of last year we already increased our positions in gold and Japanese yen. These have appreciated in value over the past few days, thus contributing to a balanced performance of the portfolios. Safe government bonds are also suitable as a hedge in the portfolio. We have therefore decided to invest the funds released from the sale of equities in global bonds. In order not to build up additional foreign currency risks, these are hedged against the Swiss franc. 

The outlook remains marked by great uncertainty. It is still possible that there will only be a short-term slump in economic development. However, the possibility that the outbreak of the coronavirus could have more serious economic consequences justifies a cautious stance in our view.