It is impossible these days for us not to talk about Covid-19 in our commentaries, as it is responsible for one of the sharpest declines in the global economy, and the Chinese economy in particular, since the collapse of Lehman Brothers in 2008-2009. It is also behind the slump we’ve seen on the stock markets for nearly the last two weeks. Some data (coal-fired power stations or the information coming from companies such as Bureau Veritas), confirms that Chinese plants appear to be picking up again. However, the contamination of other countries and continents and the containment measures to come (stage 3 of the epidemic) are going to prolong its effects on economic activity in these areas. In the history of pandemics, coronavirus is unique (as the impact of SARS was restricted to Asia). It represents all that the markets dislike in terms of the onset of risk: unexpected, global and unquantifiable, in both scale and duration. And that fact that it affects people’s lives makes it all the more essential that governments and companies live up to their social responsibilities.
Coronavirus is a respiratory pathogen that is capable of community transmission, meaning that there are multiple outbreaks of the virus that have no clear epidemiological link to the cradle of the disease; in this case, the province of Hubei. As long as the disease continues to spread worldwide (the United States will be a hot-spot as the healthcare system there is failing those on low incomes) and as long as the economic activity curve remains on the wrong side of the V (until there is a strong recovery), there will be continued disruption in the financial markets. The Fed has tried to restore calm by announcing a surprise, 50 basis-point cut in interest rates, although, for the moment, that is not enough. Even the World Health Organization (WHO) has meekly admitted to being “in uncharted territory”.
Some investors might be tempted to buy risky assets (particularly equities) in the hope that, with the virus contained, business will pick up. But although the hypothetical schedule for the virus to die out (towards the summer, due to the adverse effects of higher temperatures) should give us a glimpse of better trading days, when summer is over, we will have to look ahead to the US presidential election. The strong resurgence of Joe Biden, supported by the withdrawal and rallying of the majority of the centrist candidates (Bloomberg, Buttigieg and Klobuchar), suggests a fairly even race, both in terms of the Democratic primary and in the face-off against Donald Trump, who could lose a little ground as a result of his handling of the health crisis that is about to hit his country, too.
The start of 2020 has already been marked by a return to volatility and the rest of the year looks set to continue in this vein.
Igor de Maack, Fund manager and spokesperson at DNCA. This article was finalised in March 6th, 2020.
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