With movements reminiscent of the 2008 financial crisis this has been another very turbulent week for global stock markets with Thursday seeing some of the steepest declines since October 1987 as the World Health Organisation declared the coronavirus outbreak a pandemic and President Trump issued a unilateral travel ban on 26 European countries. The FTSE 100 declined by 10.8% meaning that it officially entered a bear market with a fall of over 20% from the 52 week high. Other world markets endured similar falls.
Market moves have been compounded by the oil price plunging to below $35 as an OPEC pact to stabilise prices unravelled. This should ultimately benefit growth, but it also risks at least temporary financial and economic dislocations in energy-heavy sectors, such as emerging market commodity exporters and parts of the U.S. high yield debt market, with shale oil producers heavily indebted and struggling to be profitable at such a low oil price.
Some of the market losses have been clawed back today but investors are inevitably feeling concerned by the speed of events and the magnitude of the market moves. We do not see this as a repeat of 2008 however with the economic and financial backdrop today much stronger. The impact of the spread of the virus will be a shock to the global economy and indeed normal work and leisure habits, as the measures taken by governments to contain the outbreak become more draconian.
It has become clear that authorities need to take aggressive public health measures to prevent the virus from spreading due to capacity constraints in the health care sector and to limit the impact on society generally. This will likely result in a sharp and deep economic slowdown in the near term meaning a period of economic recession seems inevitable and this is likely to be substantial. There are steps that can be taken by governments and central banks to restrict the damage to the economy and ensure that no long term damage results. This should justify investors with a long-term perspective, staying in the market.
Although in the West the response was initially rather disjointed there are now signs of co-ordinated global action coming together. This will need to be a joint and decisive effort between fiscal and monetary policy, to tackle the cash flow challenges faced by companies, especially small- and medium-sized enterprises, and households.
In the past week we have seen such support delivered in the new Chancellor’s Budget, the US Federal Reserve has injected liquidity of $1.5trn to support money markets and the banking system and the European Central Bank approved a series of steps to provide support through fiscal policies. To be effective more of the same type of announcements will be needed and the signs are that policymakers appreciate the importance of doing so.
The ultimate depth and duration of the coronavirus’ economic impact is highly uncertain, but there are reasons to believe that the shock should be temporary. The outbreak will eventually dissipate, as is now becoming evident in China and economic activity will normalise, provided the necessary policy responses are delivered.
At the portfolio level an emphasis on fundamentally strong businesses with low levels of debt and reduced sensitivity to wider economic moves should provide some element of protection. Investment is of course not only about equity markets however and cash, bonds and alternative assets such as infrastructure all have a part to play in reducing risk to capital during this period.
13 March 2020
