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Staying defensively positioned as coronavirus panic extends to Europe

Timely insights from portfolio managers and industry experts on key financial, economic and political issues.

The views expressed in these posts are those of the authors and are current only through the date stated. These views are subject to change at any time based upon market or other conditions, and Eaton Vance disclaims any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions for Eaton Vance are based on many factors, may not be relied upon as an indication of trading intent on behalf of any Eaton Vance strategy. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness.

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      By Edward J. Perkin, CFAChief Equity Investment Officer, Eaton Vance Management

      Boston - Financial markets around the world have been selling off today on fears that the spread of the coronavirus beyond China may be accelerating.

      A colleague in our London office reports that friends based in Italy are now working from home, with Milan becoming a ghost town due to the outbreak. Meanwhile, a Chinese colleague says that factories are reopening in China to help jumpstart output — perhaps too early?

      Global economic impact

      Whether all this turns out to be panic or a rational response to an impending pandemic, these actions will clearly have an impact on the global economy in the near term.

      The base case still seems to be that this will pass in a matter of weeks or months. Then there would be a snapback in economic activity later in the year.

      Yet I find it strange that governments and central banks are talking about stimulus and monetary easing, because those appear to be the wrong solutions for the challenge at hand.

      US political uncertainty

      I wonder if the strong showing of Bernie Sanders in the Nevada Democratic caucuses over the weekend might also be part of the reason for today's selloff.

      A consensus is emerging that Sanders — a self-described democratic socialist — may be the likely candidate to face off against Donald Trump in this November's US presidential election. It's been surprising to me how well the market has taken this possibility — at least so far.

      Bottom line: We continue to seek a moderately defensive positioning, favoring Europe and high-quality cyclical companies for their attractive valuations. We don't believe expensive defensives and bond proxies will hold up as well in a selloff as they have in the past, given how richly they are priced.