COVID-19: An unprecedented eventContributor Karen Ward
Chief Market Strategist for EMEA gives an update on how COVID-19 is impacting financial markets.
The spread of the COVID-19 virus is causing considerable volatility across financial markets. The social distancing policies that are required to contain the disease have catastrophic short-term economic effects and at this stage it is difficult to confidently say how long the economic disruption will last.
Investors are looking to countries like China and South Korea, to try and inform their forecasts. The pandemic began in China and quickly spread to its neighbours like South Korea. Authorities clamped down abruptly on travel and movement and as the data are now coming through the economic consequences of those actions are becoming clear. However so far the restrictions appear to be having the desired effect and infection rates have fallen. What we are yet to see is whether the infection rate reaccelerates when activity and movement restarts.
In Europe and the US we are at the earlier stage of the journey. Infection rates are still accelerating and the social distancing and economic consequences are still in large part to come. So we should brace ourselves for a slew of truly horrific economic data in the coming months.
The important question is how quickly economies can bounce back
But the market will not be surprised to see bad data in the coming weeks. Indeed a shockingly bad second quarter is most likely in the price. This has been the most rapid equity repricing we have ever seen, even more so than the October flash crash. In the 2008 recession is took almost 260 days for the S&P 50O index to be down 30%, this time it took just 20 days.
How quickly might the economy and markets recover? This depends on how long it takes for the disease to be contained which is hard to predict. However, what we can analyse is whether policymakers are putting in place the right supports to be sure the economy can bounce back once we are all again allowed to go out.
In this regard there are positive things to say. We will do ‘whatever it takes’ is the key strapline for policy coming from governments and central banks globally. Governments and central banks are flooding the system with liquidity but more importantly governments are realising that loans are not the solution, and instead companies and households need direct subsidies. Of course these large fiscal packages will require lots of government debt. This is where the central banks come in. By restarting their Quantitative Easing programmes they can absorb that debt ensuring government bond yields remain low.
In summary it is too early to assess the ultimate impact of the coronavirus on economic activity and corporate earnings. The sooner the virus is confidently contained, the quicker the recovery in economic activity will be, particularly given governments and central banks are acting decisively to shore up the economy and support the prospects for recovery. However, the longer the period of reduced travel to restrict the transfer of the infection, the greater will be the impact on corporate earnings.
Investing through volatile times
The clear investment implication is that, even more than usual, a well-diversified portfolio is essential. This includes diversification by region but also by asset class. Core government bonds have performed strongly. However, further upside for US Treasuries and UK gilts will be more limited from here unless these central banks shift their guidance that they do not intend to take interest rates into negative territory. Investors may wish to consider alternative diversifiers such real assets if liquidity is truly not a requirement.
Sticking to core investing principles is essential. Don’t let emotion dictate decisions, as all too often that leads investors to sell equities and other risky assets near the bottom of the market. And retain a focus on the long-term objectives.