In this blog, the Multi-Asset team responds to some of the questions it has received from clients about navigating these challenging markets.
The spread of the COVID-19 virus and its impact on global financial markets continue to cause widespread volatility and dominate investors’ minds.
The Multi-Asset team has received many questions from our wealth manager and advisory intermediary clients on navigating these challenging markets, focusing on our views, insights and outlook.
To help others who may be looking to better understand the thoughts shaping our investment decisions, we share some of the top questions and our answers below.
Q: The coronavirus is very much a global crisis – how are different countries’ economies reacting, how are they being impacted, and which ones are the more economically vulnerable to the developments, including lockdowns?
We see two types of economies emerging from this crisis: the ‘tortoises’ and the ‘hares’. The tortoises are mainly the Asian countries – including China, Singapore, Japan and Korea – that remember SARS and hid in their shells and locked down their economies. While they suffered the initial hit, the data shows they are in a better, more manageable position than the hares. These hares are the European countries, the UK, and now the US, which were slow to react and carried on running while Asia was shutting down, but the virus multiplied quickly and threatened to overwhelm their healthcare systems, leading to emergency lockdowns.
We think the countries that will be most vulnerable to the economic impact of lockdowns are ‘middle income’ emerging economies such as Brazil and Turkey. These countries have the level of expertise to lock down their economy, but just don’t have the financial backing to provide the same level of fiscal stimulus as European countries and the US, so they are the most susceptible.
Q: Do you expect a V, W, L or even U-shaped recovery?
This depends on when the government reopens the economy. There is a very difficult trade off: if it is done too early, then the virus will come back; but if it is too late, it could make the economy very weak.
We believe global growth is likely to contract by 10% in the second quarter, mainly driven by the US and Europe; this is more than twice as bad as the impact of the global financial crisis.
We believe a drawn-out recovery is more likely than a V-shaped recovery. We are worried about the fact that Singapore, Japan and China are seeing new outbreaks and a rising number of new infections at the moment. A fast V-shaped recovery would rely on sustainable containment of the virus in China, with Western countries on the same path. Wuhan lifted its lockdown after 63 days, which would mean European lockdowns being lifted potentially in mid to late May, with global activity normalising after that. In this scenario, we expect global output to contract by 3% in 2020, and rebound to 8% growth in 2021.
On the other hand, a slower, more protracted recovery would occur if lifting the lockdowns and restrictions too early led to relapses of the epidemic, which would mean Western countries could not replicate China’s success in normalising activity levels. In this scenario, we see restrictions being on and off, leading to global growth of -10% in 2020.
Q: How is this current crisis different from the 2008 global financial crisis?
In 2008, the big questions were: will the financial system actually continue to exist? Will fiat money exist? Will markets ever function again?
This time, central banks and policymakers have poured money into the markets in a way they failed to do at the beginning of 2008. A few weeks ago we witnessed a fire sale across all asset classes, but since then things have calmed down as a result of these interventions by governments and central banks. This all occurred in a much shorter period of time compared with 2008. The global financial crisis, in terms of the bear market, started in October 2007 and didn’t finish until March 2009. This has been the quickest bear market on record; it is unprecedented.
The other thing worth noting is the growth dip in the global financial crisis was gradual and lasted two to three quarters, whereas this growth dip is likely to be shorter but of much greater magnitude. The key differences are how quick the recession has occurred, how deep it is going to be, and that it may all happen over a much shorter period of time.
Q: Do you see income stocks being sold down in light of the heavy cuts to dividends across various sectors?
We believe we’re at a turning point in the overall economy, how we think about shareholder capital, and how shareholders are rewarded. It’s clear with many companies cutting or stalling their dividends, and the actions being taken by policymakers, that there is a focus on taking care of employees, which we welcome.
We are quite bearish on short-term earnings and believe markets are underestimating how much earnings could fall in the months ahead. However, dividends are more related to long-term earnings sustainability and hence they should be less impacted. For now, we are applying a conservative assumption of a 30-40% reduction for future dividends and a 5-10% reduction for future coupons from corporate bonds, including high yield, although we do expect policymakers to cushion bondholders somewhat. So overall, we believe the outlook for dividends has been priced into the market.