April 13, 2020

Covid-19: Update on its Impact on Financial Markets – 13 April 2020

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Escaping from the Lockdown

In the context of global health and economic history, the Covid-19 economic impact was initially viewed as a short term problem, albeit one with serious ramifications. As the realisation of growing infection and mortality rates take hold political leaders everywhere are now starting to grapple with balancing the medical and social issues against    the economic impact on their own country. There’s now a real concern about whether the medical management and social policy measures to flatten the curve will be robust enough to limit the impact of the pandemic to 3-6 months while still preserving their own sovereign economic integrity as well as maintaining social order.

Days since 50th Case Confirmed (Log Scale) showing rate of change for the 10 countries with highest absolute number of deaths. Source: John Hopkins University Of Medicine, Coronavirus Resource Center, Sunday, 12 April, 11:22pm EDT

Being on the western fringe of Europe and far enough away from the US has helped Ireland keep a watchful eye on the actions of other nations to see what might work and what exasperates the predicament that every country finds itself in. For that we are somewhat lucky.

Interestingly, despite it now having the largest number of deaths, the US has a relatively low number of deaths when compared to the European experience. This statistic is likely to change dramatically in  the  next  fortnight  as its rate of infection is now greater than Europe. Incidentally, Ireland’s death rate is at 6.88 per 100,000.

Nevertheless, all countries face the same dilemma. Remove the lockdown too soon and the infection rate will rise again. With it, a likely return to a lockdown that will have a deeper economic impact both in the short term on business sectors that cannot perform and in the long term on sovereign and corporate debt.

While South Korea leads the world with a massive testing per capita program instead of a lockdown, Singapore recently re-opened after a lockdown only to be thwarted by returning non-nationals who were confined to dormitories which then became serious clusters. China has had a similar non-nationals reinfection experience.

Key to the exit strategy will be antibody testing which looks for who is immune to Covid-19 as well as determining how widely it has spread and how deadly it is. If it transpires that it is less deadly than, say, the Winter Flu economies can open up. If it is a multiple of times more deadly than the Flu then the lockdown continues.

Exiting the lockdown for any country won’t be a binary movement. It will require careful planning and preparation. Deaths per 100,000 of population. Source: John Hopkins University Of Medicine, Coronavirus Resource Center, Sunday,  12 April, 11:22pm EDT

Different combinations of returning to “normal” are now being modelled worldwide by age, business/social sector and geographical area. At this stage it looks like a lottery in terms of possible results as nobody truly knows what     will work. In any event, for each day that we stay at home, the odds of a “V”-shaped economic recovery decline and a more drawn out“U” recovery will become more likely. Unfortunately, the thoughts of some governments may actually move to estimating a trade-off between accepting more deaths and kickstarting their economies, all in the name of the greater perceived good. Playing God is not a task that any politician wants, or should have.

“We have a Journey Ahead of Us”

These are the words of Pascal Donoghue last Friday. Perhaps deliberately, he excluded the word “Long” from the sentence. Forecasting the peak of infections globally is not the only condition for markets to make a lasting recovery. Investors will also need to know how much economic damage has been done and will be done to corporate earnings.

The next three weeks will see the earnings reports of all US quoted companies which are required by their financial regulator, the SEC, to report on their financial position every quarter. While there will be businesses that will have benefited in recent weeks such as Netflix and Zoom, the hospitality and travel industry’s reports will make for awful reading as they will be a hostage to the US lockdown decisions. Somewhere in between many other sectors will be trying to figure out how to manage their furloughed staff and whether there will be sufficient demand for their businesses’ products and services going forward. The thoughts of the CEOs of these companies and their international counterparts will be closely monitored and will shape investors’ approaches over the coming weeks. The leading question will be: “Can businesses survive on their own or will they need the ongoing government support?” Many companies are suspending earnings guidance as they are at a loss to understand how their own business will perform. There may even be some businesses that may never bounce back.

In broad terms, the real issue is retaining the muscle memory of the World’s economy. The virus has caused a supply and demand shock at the same time, because many companies are no longer able to produce, due to interrupted supply chains, and many consumers are no longer able to consume due to restrictions in public life and business closures. When the lockdown is lifted the hospitality sector will probably be the last to open their doors but distancing will still pose a problem in terms of the desire of past patrons to revisit old favourites!

Hold or Twist?

Given current markets can be illiquid, selling now is likely to cost more than holding on as volatility in pricing is driven by wide bid-offer spreads of individual companies and, with it, unpredictable investment valuations. If you are invested, do not look to disinvest. The long term damage could be horrendous if you miss the rebound by trying to time markets. There is no need to play roulette with your investments. Markets will recover.

For 2020, economies appear to have entered the early days of stagnation and in our view, this has not yet got factored into stockmarket pricing. Indeed, the bounce of the last 2 weeks or so is possibly a false dawn which may be savagely overturned when experimentation of lockdown releases will possibly turn sour. The jury is still out about when or how antibody testing and vaccine production will be able to start. The more doubt lasts in general, the more markets will weaken and with it an overestimate of the impact of a deep recession. Opportunities will actually present themselves when downward volatility will show movement from current levels. We are recommending that those who want to invest speak to us now about completing documentation so as to be ready to take advantage.

In the meantime, the most consistent route to avail of recent and further retrenchment is to apply a Euro Cost Averaging approach for monthly contributions to pension funds or invest large tranches in a phased manner. By investing“on the drip”, so to speak, we believe that sensible buying opportunities will emerge over the coming weeks.

April 13, 2020
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