― George R.R. Martin, A Game of Thrones
While you will read many investment publications featuring glossy print and pretty pictures extolling the lessons about past crises from very creditable sources, the highly unpalatable truth about the impact of the Coronavirus is that nobody knows.
Make no mistake: we are perhaps at the most serious juncture for risk assets and the global economy since 2011 (eurozone crisis) or 2008 (global financial crisis).
We are at a point of human emotion – the fight or flight response which is highly unpredictable. The randomness of the coronavirus plays upon our very worst fears as humans in a similar way to the scary sequences in a horror movie. It is a silent and infectious virus and we have no way of knowing – at least initially – who has it.
While we can read news stories about probabilities – in fact you are more likely to die of a heart attack reading this publication than to contract and die from coronavirus – this does not make you feel much better, and I can completely empathise with that.
Rather than looking at long-term charts about the Spanish flu epidemic in 1918, it is much more useful to look around you in daily life. The economic impact in Europe is being felt right now and will almost certainly eventually be felt in the USA too. My local Chinese restaurant has gone bankrupt, traffic into Zurich from certain areas has increased fourfold, and why was I one out of only two people at the Apple shop with15 salespeople waiting to serve me? Why are there three salespeople waiting anxiously at the entrance to the high-end watch shops for any customer to walk in? I even hear of people stealing disinfectant and face masks from hospitals – in Switzerland!
Make no mistake, we are witnessing a very sudden jolt to economic growth and are having to deal with both a supply and a demand shock, which is something none of us have seen before.
The reaction from businesses in the very short term has also been somewhat irrational, with many major companies cancelling events and all travel. I also remain somewhat concerned that the medicine governments may prescribe to us may make things worse in terms of throwing more spanners into the works of the global economy and therefore making it extremely difficult for it to gather speed again.
I apologise for my rather brutal assessment, but forewarned is forearmed.
My belief in the long-term secular bull market remains unchanged. Whilst at this point in time I may look somewhat foolish (it’s not the first time and definitely won’t be the last), my unwavering belief is that we will make it through to the other side in better shape than before.
We have too much to lose not to and we should not underestimate the vast resources at our disposal to counter this short-term crisis if the world works together. While the recent 0.5% interest rate reduction by the FOMC might seem like bringing a knife to a gun fight, I expect the Federal Reserve to do more. Other central banks will no doubt ease as well, probably in sequential order. While this is something of a placebo now, when demand returns – and come back it will – it will re-emerge in supercharged form, also aided by fiscal stimulus from governments around the world.
Think of it as putting gasoline and hand grenades on a bonfire. Of course this will eventually lead to other problems, but they will be much further down the road.
While there has been fair criticism that the initial virus outbreak was covered up in China, the country’s recent actions (which would seem draconian and unpalatable in the rest of the world) have bought us much needed time to prepare. From a purely selfish perspective, I have been somewhat disappointed in the way the world was becoming more isolationist and was thinking that we needed an external crisis to get us pulling in the same direction again.
There some signs of hope, with virus infections and the death rate declining in China. It will probably be a case of first in, first out, with Asia recovering first followed by Europe and then the USA.
I believe it is safe to assume that the trade war is now officially dead, as is the war China was waging on shadow banking. In the medium term this is much more significant than the short-term impact from the coronavirus. It also seems likely that a major risk regarding the US elections has been taken off the table, with the election likely to be fought by Trump and Biden – both acceptable candidates from a market perspective.
My guess, for what it is worth, is that markets are in a bottoming process which will result in increased volatility driven by coronavirus headlines but that we are through the worst of the falls, with downside on the S&P 500 at around the 2850-2750 level – a nasty correction/crash but no bear market. If over 50% of the S&P500 were to post declines of 20% or more, we would find ourselves in a bear market, in which case I would expect a change in market leadership going forward, with perhaps one of the best money-making bets backing a rebound in economically cyclical sectors in the second half of the year.
I expect double-digit gains from major equity markets this year and next, but these won`t be achieved without excitement.
Peter Ahluwalia, Partner
Chief Investment Officer
peter.ahluwalia@swisspartners.com
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