01st Quarter 2020 Market Outlook: Impact of Covid-19

The following is an assessment of the economic impact of Covid-19, for the 01^st 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, led 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 12^th 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 favour of equities.  While downside risk to the 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.