Weekly View - Closed for business
As more countries and municipalities shut down and borders close, both the US and the UK have U-turned in their coronavirus containment policies and rhetoric. We will witness the second-largest contraction in global growth after World War II as a result of ongoing containment measures. The key question now is how deep and how long the downturn will be, which depends on the evolution of the virus. We remain underweight equities as events unfold. China, which last week reported no new domestic coronavirus cases, has seen a rebound in economic activity, but it is taking longer to return to normal levels than expected. We continue to prefer Asia within emerging markets.
Global policy responses have been aggressive. On the monetary side, the European Central Bank committed to a bold EUR 700bn programme of quite flexible QE, while the Federal Reserve has also announced QE package, including purchases of commercial paper and municipal bonds, and it installed vital daily dollar swap lines with other central banks. Perhaps more critically, on the fiscal side, governments, particularly in Europe, have pledged sizeable spending plans. Normally prudent Germany will announce a spending plan amounting to 10% of GDP today, a figure that so far accounts for 1.5% of global GDP. We expect that to increase even further in coming weeks in order to avoid a deep recession.
Markets continue to lurch to and fro. The huge volatility jump has levelled a heavy pressure on investor shoulders. Forced selling has ensued, especially from investors that were short volatility or invested with leverage, but in the complete absence of market liquidity. Prices collapsed as a result and every intermittent rebound met more selling pressure. In the fixed-income space, investors offloaded around USD100 bn in one week, about 25% of last year’s total inflows. There was nowhere left to hide as even defensive trades like Treasuries and gold sold off for the sake of cash. Within equities, passive investment is being tested as investors try to sell out of ETFs without buyers on the receiving end; we prefer active stock picking, especially among low-leveraged equities, as well as quality credit in fixed income. This week, whether we see Italy’s coronavirus cases begin to fall following the extensive containment measures taken will be a key bellwether of an end to the crisis.