Fiesole, in the hills above Florence, felt very empty in 1348. As Boccaccio described in The Decameron, this was because the locals had gone into self-isolation to avoid catching and passing on the plague. But his work, in which a group of ten young Fiesole women and men isolate themselves together on a country estate, and tell each other stories, was one of the starting points for the Renaissance.
The current lockdown reflects the grim realities of our own times. The global virus has now claimed more than 35,000 lives and is causing enormous social upheaval, in terms of lost jobs, isolation and uncertainty over the future. But amid these horrors, it is perhaps all the more important to recognise the few chinks of light; not least the fresh appreciation shown to NHS workers in the UK and to healthcare professionals more generally around the world.
As for economics and finance, the problem of the coronavirus and ensuing lockdown is giving rise to extraordinary measures that would never usually be countenanced. When the UK’s economic footing was transformed for two world wars, the changes precipitated radical changes to the economy and society of the day (among them the creation of the NHS). In such extreme scenarios, new forms of thinking can be suddenly validated.
Radical approaches were certainly in evidence last week. The UK was ushered into semi-lockdown at the start of the trading week, following many of its European peers, while Rishi Sunak, having already pledged £330 billion in stimulus, said the government would provide for 80% of the wages of the self-employed (to a certain threshold).
However, the greatest radicalism was in evidence in the US, the country that now has more confirmed cases of the virus than any other. Forecasts for US GDP in the second quarter, released last week, show quite a range of possibilities, but all make for grim reading. To give two examples, J. P. Morgan predicts a 14% contraction, while Morgan Stanley puts the number at 30%.
Yet such numbers should come as no surprise. Obvious as it may be, it is still breath-taking to read that US restaurant bookings are down 100%. Jobless numbers showed a steep rise last week, with a record 3.28 million applicants for unemployment benefit – up three million in a week. So ends a decade of jobs growth. The number of claimants was nearly five times the previous record high. Concerned by such trends, the US president initially said he saw the US reopening for business after Easter, but he rowed back on the pledge over the weekend.
“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,”
said Mark Dowding of BlueBay, co-manager of the St. James’s Place Strategic Income fund. “[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.”
Last week, the president’s $2 trillion stimulus package was passed through both houses of Congress, as the Economic Policy Uncertainty Index struck a record high. The package will provide direct cheques to many US citizens, as well as dramatically expanding unemployment insurance, offering hundreds of billions in loans to business, and providing extra funding for healthcare providers – and this from a Republican administration.
The Fed’s actions may have been more important still. Its balance sheet had already clocked a new record high in the second half of March, but last week the US central bank rolled out a new set of policy measures to stabilise credit markets and limit the economic contraction. Investment grade bonds rallied in response.
Some of the actions it listed are unprecedented, going well beyond what was done in 2008–09. They included support for consumers and businesses, for commercial real estate, for corporate bonds, for municipal finance, and for much else besides. No wonder the S&P 500 had such a spectacular week – its best since March 2009. The EURO STOXX 50, FTSE 100 and CSI 300 in China also saw strong rises.
But the most eye-catching of the Fed’s measures is its decision to pledge unlimited quantitative easing; the Fed has effectively underwritten all 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.”
As in society, so on markets, the pandemic (and the measures implemented as a result) are having a universal impact, 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 top ten holdings in the portfolio.”
The indiscriminate nature of the sell-off means it is not just equity markets that are reeling at the moment; bonds have been suffering, too, not least in emerging markets (EMs). 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.”
Just as the virus was first identified in China, so China may yet prove crucial to the global recovery. Already, the lockdown is soon to be lifted across most of Hubei province, with Wuhan’s lockdown due to end sometime in April. A few small signs of hope emerged even last week. Steel inventories at the largest Chinese manufacturers may have doubled, but Chinese steel demand is already bouncing back, according to CEIC figures. (China is the world’s largest steelmaker.) Chinese investors, meanwhile, are using more loans to buy stock than at any time since the bubble burst in 2015. The low oil price certainly helps China, too.
That said, total debt figures for China in 2019, which came in last week, showed it reaching a record 250% of GDP last year, meaning further stimulus options may be limited. Moreover, key data for Chinese exports is yet to be published and is unlikely to reassure investors. There is, it seems, a long way to go yet, even in the one country that appears to be over the worst.
BlueBay, Burgundy and J O Hambro are fund managers for St. James’s Place.
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