The following is an assessment of
the economic impact of Covid-19, for the 01st quarter of 2020. This is the consideration of the market, and
the impact on your investments, as well as possible opportunities.
We have to consider that because we
have various combinations of inadequate enforcement of quarantine, testing, and
healthcare in Europe, North America, and elsewhere, a lot of people will fall
sick, and many will die. This is a
social consequence. This is a human
tragedy. However, this is not how the
market works, beyond market sentiment and consumer confidence. There is still value in investing in the
correct sectors of the correct economies.
We can confirm that since the
coronavirus outbreak in early December 2019, in Wuhan, China, authorities from
China have undertaken a number of measures to contain the pandemic. Authorities in major developed economies in
East Asia have been particularly successful in flattening the curve of
infection spread.
Since then, the Coronavirus outbreak
has spread globally beyond China, as new confirmed cases outside China exceeded
those in China. China has ceased to
report new domestic cases. All cases are
imported. The experience of Singapore,
Hong Kong, Taiwan, South Korea, and Japan, who were early responders to the
crisis is that we will gradually see imported cases outnumber domestic
infections.
This is not the case in the new epicentres
of infection: Europe and North America. As
such, the World Health Organisation has
officially declared this outbreak as a global pandemic, and there is a race
between the containment measures implemented by governments and spread of the
disease.
In response, global central banks
stepped up their response, with the Federal Reserve cutting policy rates by 50
basis points in an unscheduled meeting with more action scheduled in the upcoming
FOMC meeting. The European Central Bank has
launched an extra emergency bond-buying programme worth €750 billion (US$820
billion) to calm markets and protect the Euro-area economy struggling to cope
with the coronavirus epidemic. This has
worked to calm the markets in Italy and Spain, viewed as most vulnerable.
We expect further such Keynesian
measures to boost liquidity, through quantitative easing and cutting lending
rates. This is meant to prop up the
sectors of the economy hit hardest by quarantine and depressed consumer
demand. The US government is proposing up
to a trillion-dollar bailout, and similar measures are expected all over the
world. This will eventually boost the
shares in the market.
That being said, I fully expect
certain economies to go into a recession for the next 18 months at least, due
to contraction. This is not necessarily
a bad thing. It is an opportunity for
structural changes in the global economies that will lead to more social welfare
spending down the road. This is especially
so in countries facing elections in the next 18 months such as the US and
Singapore.
One of the complications in the
market is the oil shock brought about by a price war between OPEC, led by Saudi
Arabia, and Russia. Both are pumping out
crude, driving down prices and affecting futures markets. This has caused oil prices to plummet 26%, to
an 18-year low. As such, other crude
producers are having market shocks as well, further deepening the prospects of
a recession.
The aim of the Saudis is to force
other producers to heel by out-producing them, grabbing market share, and then
raising prices again. This playbook is
out of the 1970s, and is inadequate in the current climate. It will simply force shale producers to cut
back, and they will raise production again when prices go up. The Russians have the reserves to wait out
the Saudis, since they are also a leading producer of natural gas. Their economy is slightly more diversified. Up to 80% of the Saudi economy is dependent on
oil production.
The US has moved to calm the
market. Despite being the largest
producer of crude in the world, they have pledged to buy 30 million barrels of
crude, taking advantage of the low prices to stock up on their reserves. This huge order gives a semblance of
certainty to the market.
That all being said, the global economy
is in the early stages of a recovery, lead by China opening her production
lines once again. Major financial
centres in East Asia such as Singapore, Hong Kong, Shanghai, and Tokyo are in a
better shape than Europe and North America.
They will continue to be the driving force for growth. There has been a noticeable bottoming out of
the market, and a slight upward trend as measures take effect and consumer confidence
returns.
Based on the concerns pertaining to
the pandemic and plummeting oil prices mentioned above, global stock markets have
continued a sell down in the immediate last few weeks. This is not necessarily a reflection of the
underlying value of assets. This is
market sentiment and panic. For example,
on the 12th March 2020, the Dow Jones Industrial Average faced its biggest
single day drop since 1987, entering into the bear market territory. The resultant flight to safety pushed US
Treasury bond prices to record levels, leaving yields at a historical low. The 10-year US Treasury yield touched a
record low of below 0.4%.
This drawdown of equities, and the
fall in bond yields, have pushed the relative valuation to an attractive level,
in favor of equities. While downside
risk to economy and equity markets cannot be ignored, the relative value of
equities will prevail once the situation stabilises. Hence, it is sensible to implement a
dollar-cost-averaging approach to capture the long-term return potential of
equity markets. Areas to look at would
be Asian manufacturing, healthcare, technology, and hospitality.
The current pandemic has created a
demand for sanitisers, masks, healthcare and sanitary products, and home entertainment. There is obvious value in healthcare and
pharmaceuticals, and their stocks are relatively low. Technology counters are attractive, especially
when we consider the explosion in online retail, and its expansion into
non-traditional products. Hospitality is
an interesting case. Hotels are
suffering now, but once the recovery from the pandemic is confirmed, I expect
travel to explode again. It makes sense
to take advantage of the low equity prices to expand positions in favoured stocks
and sectors, with an eye to an investment horizon of above 18 months.
For those who have the means, I see
great merit in holding a higher-than-average cash balance to facilitate buying assets
that are relatively cheaper when opportunities prevail. This is the time to leverage that cash
position into expanded market share.
In summary, global growth will
likely experience a sharp slowdown for most of 2020. We expect a recovery, but with significant
delays. Policy support could accelerate
the process. While there is danger of a
major recession in specific major economies, it will be short.
Our immediate concerns in the coming
months, is that further development of Covid-19, pertaining to its severity and
duration will have an impact on both the demand and supply side, consumer
confidence, and production and supply chain disruption.