Quarterly update: The coronavirus economy
After finishing 2019 on a high, the pandemic provided an unexpected shock for markets in the first quarter of 2020
3 min read
Financial markets faced a dramatic start to the year as coronavirus swept across the globe and stringent measures to hinder the spread of the virus were put in place.
Investor sentiment faltered rapidly as the scale of the pandemic became clear. Head of Investment Strategy Sven Balzer highlighted the importance of a considered approach to these unusual circumstances.
“We have reduced our equity exposure to soften our overall risk profile and create a reserve of cash to seize opportunities that can be created by market dislocations,” he says. “But we are cautious of making big changes in the face of a situation where the long-term outcomes aren’t clear.”
Nothing else mattered this quarter
The pandemic has since eclipsed some of the other events that usually affect the market’s mood. For example, stock markets experienced some volatility in January after the US stoked geopolitical tensions by assassinating Iranian general Qassem Suleimani. In addition, Saudi Arabia sparked an oil price war in early March when Russia refused to abide by OPEC oil production limits, sending oil prices plummeting.
In normal circumstances these could be expected to dominate headlines on financial pages. But any impact they may have had has been swamped, highlighting how quickly investor sentiment can turn during a non-financial crisis.
How did we get here?
Fears about COVID-19 initially focused on China, where the problem originated. As the disease began to cross continents, it became clear that the consequences would be far more widespread than first thought. Uncertainty affected stock markets, which experienced high levels of volatility after the worst sell-off for more than a decade in March.
“There’s still a lot we don’t know about COVID-19, including how rapidly it spreads, survival rates and potential treatments,” says Sven. “Containment measures in China and South Korea appear to have been successful, but we still don’t know if the fall in infection rates will endure.
“Taking into account the limited information available to us, we think that social containment measures in Europe and the US are very likely to stay in place through April and into May, and may not loosen until summer.”
The coronavirus economy
The overall economic impact of the virus will depend on the success of containment measures and the financial support governments offer to households and businesses.
As people have stopped going out, there’s been a major effect on global consumer demand. Efforts to slow down the spread of the disease mean households aren’t able to spend money as they used to on travelling, shopping on the high street, eating out or going to the theatre and cinema. Businesses in these sectors are already suffering.
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Containment measures are also likely to affect productivity. Many schools are now closed, meaning workers will experience the added pressure of having extra childcare responsibilities during the day.
The demand shock is likely to persist throughout the second quarter. But Sven points out that when we come to our next quarterly review, we could be starting to consider what the post-pandemic economy looks like.
“It’s worth remembering that economic indicators pointed to a period of recovery at the start of 2020 after a slowdown at the end of 2018,” he says “While the pandemic has knocked markets off kilter, it is not a shock caused by economic or financial factors. We believe that when coronavirus recedes, the seeds of economic growth that now lie dormant could spring back to life.”
Government and central banks to the rescue
Instrumental in any recovery will be the actions being taken now by central banks and governments to protect economies.
Central banks around the world have acted decisively to boost the money supply with rate cuts and unprecedented levels of quantitative easing. In addition we have seen historic levels of fiscal stimulus – £330 billion from the UK government, billions of yuan in loans for businesses affected by the virus from the People’s Bank of China and over $2 trillion from the US government. This is all aimed at tiding businesses over during periods of lockdown.
Sven observes, “Authorities are rising to the challenge presented by the pandemic. A credit crunch is a real risk, so it is essential to see policymakers securing the supply of money to those who need it.
“Stimulus measures from the UK are well-timed and well-aimed at small businesses. Action from the US came with a little less alacrity, but the scale sends a clear message that the government is ready to do whatever it takes to support the economy.”
Sven adds that, in the longer term, these decisions could have wider consequences. “We have seen huge increases in borrowing from countries already labouring under high levels of government debt, which could raise concerns around the sustainability of debt levels in the future,” he says. “And governments that have been arguing for years that there is no money to fund social services may find their positions challenged after so much money has been spent supporting businesses during the outbreak.
“After the pandemic has passed, we could see the roots of a new normal, and investors will have to change and adapt accordingly."
When investing, past performance should not be taken as a guide to future performance. The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your original investment.
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