- The Covid-19 pandemic and intervention from authorities create volatile and unpredictable markets for investors.
- The global economic and corporate earnings backdrop looks dreadful over the short term, but global investors are beginning to look beyond this in the hope of better times ahead.
- Governments and central banks continue to support the financial markets with their “whatever it takes” approach, providing much needed reassurances.
- In the UK, the Bank of England warns of the worst recession since 1709, while the outlook for Europe looks similar.
- Investing in the age of coronavirus involves much damage assessment and a discerning eye.
- Covid-19 will change the investment backdrop: investors will need to understand how this will change global consumer habits and spending characteristics. In the meantime, think rationally – not emotionally – about the markets.
Setting a clear investment objective for global investors has been extremely difficult over the past two months: global equity market indices appeared to bottom out on 23 March 2020 from their previous highs, before rebounding with as much dynamism in April as they fell in March. For anyone other than seasoned investors with experience of other unexpected financial crisis, such as the technology bubble bursting, the eurozone crisis and the 2008 financial crisis, Covid-19 will have created significant challenges.
All these previous crises created collapses that authorities, economists and traders were rapidly able to comprehend. A pandemic, on the other hand, is considerably worse: there are high levels of fatalities and a great deal of uncertainty for millions of people throughout the world as the global economy shuts down and jobs and businesses go under with alarming speed. And as the Covid-19 pandemic continues to ravage much of the globe, it has become far harder to navigate investment strategies over the short term.
Needless to say, the global economic backdrop looks extremely bad. In the US, almost 37 million people have submitted new unemployment claims over the past two months, while in India, some 115 million jobs have been lost. The picture is similar in other regions: in the UK, Chancellor Rishi Sunak has introduced a short-term payment scheme for workers that is likely to cost the government more than £80 billion (according to the Institute for Fiscal Studies).
Since the pandemic is expected to cost between US$6 trillion and US$8 trillion (according to the Asian Development Bank) and given the speed at which the global economy is shrinking, there are more than enough concerns to keep investors anxious. In the UK, the Bank of England has warned that the economy is likely to decrease by as much as 30%, creating the worst recession since 1709. In Europe, the European Commission has issued similarly bleak forecasts, with Italy, Spain and Greece likely to suffer the most.
Corporate profitability has also been hit hard across many sectors – as the first-quarter earnings figures have shown. And there is every likelihood that the second quarter numbers will be even worse. Over the short term, therefore, the fundamentals look somewhat bleak.
Nevertheless, stock markets have actually risen over the past month. There is a battle being waged between reality and hope, and the latter has clearly gained the upper hand.
This recent stock market rally has been fuelled by governments’ and central banks’ promises to do whatever it takes to safeguard the global economy and eradicate the virus. The US Federal Reserve Bank, for example, has announced an unprecedented series of stimulus packages to ensure that there is enough liquidity in the market. Indeed, according to one market commentator, we should “forget the bazookas and helicopters: the Fed is loading up the B-52s for a penultimate strike to protect the US economy throughout these difficult times”.
The promise of further assistance where needed – loose monetary policies for an extended period of time – and the possibility that a vaccine may come sooner rather than later seem to have created a more optimistic and promising backdrop for investors, which would explain the April stock market rally.
Unfortunately, however, this recent burst of euphoria could easily be burst by a second Covid-19 wave, or when the realities of a weaker global economy really start to kick in. The market currently appears to be pricing in a “V”-shaped recovery. This seems rather optimistic, and as the weeks and months go by and global lockdown rules are relaxed with a view to some form of normality being resumed, this is likely to transition into a “U”-shaped recovery.
Nonetheless, the reopening of China’s economy has seen industrial production for April rebound by almost 4%. Admittedly, investment and consumption continue to fall amid sluggish domestic demand, but some seeds of hope have been sown, and a few early green shoots are already appearing.
The economic backdrop is extremely poor, and the macro outlook is depressing. However, the worst is most likely behind us. Once again, the central banks have stabilised the situation that the world found itself in two months ago and governments have been gradually implementing their strategies for a slow emergence from the lockdown. We should therefore see the beginnings of a recovery pattern for both businesses and manufacturing as the world gets back to work.
Investing in the age of coronavirus involves more damage assessment than trying to forecast future returns. And doing so requires a discerning eye in a complex world with a short attention span.
The new normal is going to be vastly different, with some big winners and some big losers. Long-term investors will therefore need to focus on changes in the global economy, how business is executed and the emergence of new consumption patterns. Not all sectors have been equally penalised by the Covid-19 pandemic: travel, airlines, cruise ships, hotels, department stores, restaurants and anything oil related have all been hit very hard, whereas technology, healthcare, hygiene, food and anything home media related have all flourished, as the world has started working remotely and social distancing measures have been implemented.
We believe that the pandemic will change many people’s lives, from both a working and social perspective. Investors will therefore need to understand changes in global consumer habits and spending characteristics. And doing so will open up further investment opportunities for long-term investors.
But in the short term, this period of uncertainty is likely to continue, leading to higher levels of volatility in financial assets. A crisis created by a pandemic is clearly quite different to a financial crisis. But governments, central banks and scientists around the world will eventually stabilise the global economy and find a vaccine for the virus, leading to better times. In the meantime, for those who have the patience, the long-term rewards will make it worthwhile.
Provided, of course, that they “think rationally – not emotionally – about the markets” over the coming weeks.