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Expect Further Market Turbulence - Carmignac

Editorial Staff, 25 March 2020

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The French asset management house considers what the next few months hold for investment and economics as the COVID-19 pandemic continues.

We continue to track what some wealth management houses think about the investment implications of COVID-19, while ensuring that we don’t overburden readers with the subject at this challenging time. We take insights from Didier Saint Georges, member of the strategic investment committee at Carmignac, the wealth management house.

The coronavirus pandemic is bringing most large economies to a halt. What will the medium-term impact be? Is this year a write-off for a whole section of the global economy?
“It is not the pandemic that is bringing economies to a halt, but the essential confinement measures taken to limit the human cost. This is a deliberate, perfectly understandable political choice which seemingly has no limits in terms of economic cost. As such, it is impossible to predict the scale of the latter, which will depend on how the war against the virus progresses. It is this unquantifiable uncertainty that the markets now struggle to cope with. The idea of a V-shaped economic recovery once the pandemic passes seems optimistic: violent shocks are generally followed by hysteresis, as was the case in 2008, in the form of lasting damage to confidence, propensity to save, employment and supply chains.”

Christine Lagarde’s speech disappointed investors who were hoping for another rate cut. The President of the ECB also blamed national governments. Was she right to act as she did? Is it now over to them?
“Christine Lagarde may have been a little clumsy in her choice of words but that is not so important. The main problem is twofold: her message was one of support predetermined in its scale, the opposite of an unlimited commitment that might reassure the markets as did Mario Draghi’s “whatever it takes” in 2012. By acting in this way, she was most likely reflecting a lack of consensus at the ECB for exceptional measures that may be necessary. Also, by stressing - however rightly - the need for financial intervention from governments themselves, she highlighted the present lack of coordination between the ECB’s monetary policy and national, and ultimately EU, fiscal policy.”

Is helicopter money, i.e. cash drops, the most effective way of turning the economy around?
“For the time being, the priority is not to turn the economy around but to at least prevent a few weeks of economic torpor from inflicting lasting damage on businesses, especially the smallest and most fragile ones: tradesmen and consumers. Only once economic activity is allowed to recover should we be introducing stimulus packages. By that stage, public deficits will be even bigger than they are today and central banks will have used all of their conventional weapons, and we will doubtless have to contemplate new solutions. It is likely that these will include helicopter money, or ‘modern monetary theory'.”

Could this epidemic change the result of the US elections in November?
“It is obvious that, at first, Donald Trump greatly underestimated the gravity of the epidemic and its importance for the US. He showed a clear lack of leadership. Also, the strength of the US economy and enviable performance of the US stock market were among his main campaign arguments. His position in view of the elections is therefore much weaker now, relative to that of his probable Democrat opponent, Joe Biden. But there are still nearly eight months to go before the presidential ballot. Developments in the situation will either confirm Trump’s errors of judgment and present his opponent with some rather large targets to attack, or give him the chance to restore his image and unite US opinion around him in adversity. Anything could happen.”

Liquidity problems are being felt in debt markets while high yield spreads are widening very quickly. Do we just need to move away from bonds?
“Bonds are a very different asset class from equities in the sense that, if the issuer does not go bankrupt, holders are sure to recover the nominal value of their investment on maturity. As such, bond prices can be extremely volatile and serious liquidity problems can arise, but the bonds of issuers who can make it through this unprecedented period unscathed may offer some highly attractive entry points in such circumstances. The difficulty for investors lies in the need for very high tolerance of volatility, and especially in the requirement for a highly accurate analysis of companies’ solvency.”

Does the fall in financial markets now provide an attractive entry point for reallocating some assets to shares?
“Financial markets have entered a highly unstable period, not just because of the ramifications of the coronavirus crisis but also because financial and macroeconomic conditions had become very fragile. For the past decade or so, central banks’ intervention has sustained an unprecedented performance by financial markets, while real economic growth has remained sluggish. 

“As a result, now that a health crisis is triggering a deflationary shock through a drop in demand, in the face of which central banks and governments are relatively helpless, the markets must contemplate some brutal economic repercussions. They will probably remain highly unstable until they manage to quantify these repercussions.”

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