26 March 2020
Baccaccio, in The Decameron, described how empty Fiesole (located in the hills above Florence) felt in 1348 – all the locals had gone into self-isolation in order to avoid catching and passing on the plague. But his work, which tells the story of 10 young Fiesole women and men who isolate themselves together on a country estate and tell each other stories, was one of the starting points for the Renaissance and changed the face of art and literature completely.
It leads us to ask, how will our culture be changed after our own current lockdown has passed? The grim realities of our time may look bleak – the global virus has, at time of writing, claimed more than 35,000 lives and is causing enormous social upheaval from lost jobs and uncertainty over the future – but it is now more than ever that we must recognise what chinks of light we can find, not least of which is the fresh appreciation shown to NHS workers in the UK (see In The Picture, below) and to healthcare professionals around the world.
Turning to economics and finance, the problem of the coronavirus and subsequent lockdown is inspiring extraordinary measures that would never usually be countenanced. Comparably, when the UK’s economic standing was transformed for two world wars, the changes precipitated radical changes to both the economy and society of the day (one of them being the creation of the NHS). In situations like this, new forms of thinking become suddenly validated.
And radical was certainly the order of the day last week. The UK followed many of its European peers and ushered in a semi-lockdown at the start of the trading week, while Rishi Sunak, after already pledging £330 billion in stimulus, announced the government would provide for 80% of self-employed workers’ wages (with a threshold).
But the greatest radicalism we have seen happened in the US, where there are now more confirmed cases of the virus than any other country. Forecasts for the US GDP in the second quarter, released last week, show a range of possibilities, but all agree that the outlook is grim. Two examples include a prediction from J.P. Morgan of a 14% contraction, while Morgan Stanley estimates a much higher percentage of 30%.
Numbers like these shouldn’t come as a surprise; however, it is still breath-taking to read that US restaurant bookings are down 100%. Similarly, unemployment numbers rose steeply, with a record of 3.28 million applicants for unemployment benefit – nearly five times the record high and up three million in a single week. This brings a crashing end to a decade of job growth. After initially saying the US would reopen for business after Easter, the president has rowed back on his pledge over the weekend.
Mark Dowding of Bluebay, Co-manager of the St. James’s Place Strategic Income fund, says: “A record 3.3 million US jobless claims and plunging PMI surveys appear to offer only a foretaste of the economic downturn resulting from lockdown measures, aimed at slowing the spread of the virus. [We expect growth to] effectively lower … over 2020 as a whole by as much as 5%. However, it appears that the authorities are now throwing the kitchen sink at the problem with respect to aggressive fiscal and monetary easing.”
The president’s $2 trillion stimulus package was passed through both houses of congress last week as the Economic Policy Uncertainty Index struck a record high, and the package will provide direct cheques to many US citizens, while also dramatically expanding unemployment insurance, offering hundreds of billions in loans to businesses, and providing extra funding for healthcare providers. All this from a Republican administration, too.
Extraordinary actions from the Fed
The Fed proved no less extraordinary in its actions – while its balance sheet had already clocked a new record high in the second half of March, last week the US central bank introduced a new set of policy measures to stabilise credit markets and limit the economic contraction. Investment grade bonds then rallied in response.
Some of these actions went well beyond even what was seen in 2008-09; they included support for consumers and businesses, for commercial real estate, for municipal finance, and even more besides. It’s therefore unsurprising that the S&P 500 had its best week since March 2009. Strong rises were also seen in the EURO STOXX 50, FTSE 100 and CSI 300 in China.
Let’s not forget the most eye-catching of these new measures, however – the Fed decided to pledge unlimited quantitative easing, effectively underwriting all of the government’s new borrowing.
“We need massive intervention by monetary authorities in credit and possibly equity markets – we need a highly active buyer of last resort,” said Richard Rooney, Chief Investment Officer at Burgundy, Co-manager of the St. James’s Place Worldwide Managed fund. “The Federal Reserve largely satisfied this condition on Monday with a huge array of facilities aimed at providing vast amounts of liquidity to the markets. They should probably be prepared to do more. The European Central Bank has also announced a large asset-purchase program.”
Market pandemic, too?
The pandemic hasn’t just had a universal impact on society either – alongside the measures implanted as a result of the virus, markets have been totally affected, with differentiation between companies sometimes lost in the fear.
“The market sell-off continues to be indiscriminate,” said Ben Leyland of J O Hambro, Co-manager of the St. James’s Place Global Equity fund. “This is not like 2000 or 2008 when there was one clear sector leading the market down. As long as you avoided technology in the former, or financials in the latter, your relative performance was fine. This time, apart from energy, there is no scapegoat sector, and equally, no hiding place. Equities, bonds and gold have all fallen together… [But] even after stress-testing our companies, we see huge value in certain stocks. In recent months we had been reducing our exposure in Compass and Safran, for example, on valuation grounds, but they are now back to being the top 10 holdings in the portfolio.”
It’s not just equity markets that are feeling the effects of this – because of the indiscriminate nature of the sell-off, bonds, particularly in emerging markets, have been suffering as well. Do bond fund managers see similar opportunities?
“Coronavirus definitely has created technical challenges, with volatility unprecedented for the last 10-15 years,” said Polina Kurdyavko of BlueBay. “In terms of systemic risk, what could drive it in EMs this time around? Generally, we see two drivers: leverage and liquidity. Corporate credit has just over $200 billion of refinancing this year, and two thirds of that comes from China. Out of all countries in EMs, China is in the best position to provide emergency support. We think the areas of focus for us should remain domestic sectors, especially Chinese real estate – the key beneficiary from domestic liquidity.”
Looking to China
China, the epicentre of the pandemic, may also prove to be our starting point for global recovery. The lockdown will shortly be lifted across the majority of Hubei province, with Wuhan’s due to end at some point in April. Small signs of hope have also begun to emerge, with Chinese steel demand already bouncing back despite steel inventories at the largest Chinese manufactures doubling. Meanwhile, Chinese investors are using more loans to buy stock than at any time since the bubble burst in 2015.
There’s still a long way to go yet, however, with total debt figures for China in 2019 reaching a record of 250% GDP last year and key data for Chinese exports, though yet to be published, is unlikely to reassure investors. Further stimulus options may therefore be limited.