Client Affairs

Coronavirus, Public Policy And Markets: What Wealth Managers Say

Jackie Bennion, Deputy Editor, 26 March 2020

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As inboxes overflow with updates on the global response to COVID-19, here is a mix of responses from chief economists. They examine the massive support package coming out of the US and point to the uncomfortable tension between human health and economic cost.

“European and Chinese societies, as well as some American states, worried by the death toll in Italy, have weighed the cost of human lives against that of severe economic disruption and have, quickly or slowly, opted for life,” George Lagarias, chief economist at Mazars, said in a briefing note yesterday. And his is one of a chorus of voices talking about the crisis and trying to figure out what investors should think about it. 

This week the US government unveiled a $2 trillion support package after much wrangling between different political groupings in Capitol Hill. This adds to the big money printing, aka quantitative easing, of the Federal Reserve and other central banks around the world. We now live in a world where borrowing costs have been slashed to the point of zero. Banks' reserve requirements have been cut. 

What do wealth and asset managers think about all this? Here is a selection of comments:

Christopher Smart, chief global strategist and head of the Barings Investment Institute, said the fiscal package moving through the US Congress appears to have “exactly what businesses and households need right now: loans, tax breaks and benefits that help replace lost revenues and family income. It probably won't be enough when all is said and done, but it's much better than nothing at all.”

Smart argues that the Fed did all it could last week to stabilise financing channels and ensure that companies could borrow at reasonable rates in spite of the current health crisis. But he cautioned that “access to cheap financing only goes so far when you don’t have any revenues.”

Mazars chief economist, George Lagarias, pointed out that for the first time in 100-plus years of financial history, the world is in an economic and financial crisis not caused by market boom and bust cycles or by the way business functions. “Economically, we are staring at a GDP contraction of 10 to 20 per cent in a quarter for many developed economies, unheard of since WWII and maybe more to come. This is more than twice the economic fallout of the 2008 financial crisis, which was spread out in 18 months,” he said.

For investors that means looking outside markets for signs as to when the crisis will be over. From quickest to slowest, Lagarias cast three basic scenarios under which  “social distancing” measures would be lifted:

1. Easy, available and cheap testing or warmer conditions that may slow infections to a pace acceptable for lifting some measures; 
2. Some medicines are already in circulation that can be used to create a solid cure protocol, enough to re-open most parts of the economy; and 
3. The invention and proliferation of a vaccine that signals a proper return to business.

Until then, he said, stock and bond markets can’t be seen as "fully functioning" to raise and allocate capital.

With more than 1 billion people virtually under house arrest, including New York and London, most investment meetings are going to be about maintenance for now, he said. “Fund managers will be watching their holdings, mitigating losses wherever possible, but probably won’t be investing significantly until more clarity has been reached." He said it is difficult to believe that any major investment decisions will be made by investors “locked in their living room with their children.” Therefore, there is no point in looking at traditional market metrics, such as valuations “to flag a possible recovery, or take movements hereafter at face value.”

Weighing the situation from BMO Global Asset Management, chief economist for multi-asset EMEA, Steve Bell, said economists are “still way behind” in recognising the scale of the coming recession, adding that the level of decline in corporate profits will be similarly dramatic.

On the monetary side, Bell said that rate cuts by US and other central banks were of limited value but that other actions have been better at calming markets. “Fiscal action is what ordinary people need and there have been big bold policies proposed by the US, with the UK and many others planning similar policies, but these will merely serve to cushion the blow, to reduce not avert recession."

Optimism rests on the US and Europe following the pattern of recovery in China, and the worst of the economic effects being delivered in the next three months. “The speed of the downturn has been increased by technical factors that have nearly run their course, and so we see scope for a bounce. In addition, many investors will need to buy a lot of equities in order to rebalance their portfolios from the fall in equity markets. I don’t think we have hit market lows, but we are not far from them,” Bell said.

BMO’s multi-asset manager in the US, Jon Adams, said some of the blows to US GDP were severe, with JP Morgan estimating a contraction of 14 per cent and Goldman Sachs predicting a 24 per cent contraction. Adams thought US jobless figures could reach 2 million.

“The Fed today has effectively backstopped local governments, with more announcements to come over the weekend. US government will prepare a third tranche of fiscal stimulus, Senate should pass it early next week, then it will move to the House. We expect $1.5 trillion to be announced, which is over 7 per cent of GDP and much larger than in 2009 ($831 million). Overall, US is moving towards maximum stimulus and the Fed has acted very aggressively,” Adams said.

Commenting on UK markets reactions to the US package, Mike Owens at Saxo Markets said: “A mixture of factors are playing into the strong move higher than we’ve seen on the FTSE and for global equity markets more generally. Firstly, the agreement from the US Senate on a $2 trillion coronavirus stimulus package, which the market sees as a key-needed support and, secondly, equities were looking extremely oversold at their levels on Monday evening which justified a bounce technically. Lastly, investors seem to be dusting themselves off and taking the opportunity to pick up stocks at beaten up prices as the most heavily sold off companies gain the most.”

Meanwhile, Finbold used the amplified news cycle to share data on which countries and institutions own the world’s gold reserves. It found that the US is way out ahead, controlling just shy of 15 per cent (8,965.15 tons) of total gold reserves worldwide. Germany and Italy ranked second and fourth, and France fifth. The International Monetary Fund took third ranking with 3,101.53 tons in reserves, and Russia, holding roughly a quarter of what the US holds, in sixth and China in seventh. Switzerland is in the top 10 as are India and Japan. The UK is not. The EU as a bloc came in at 12. The Dutch 11.

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