We are early in the spread of Coronavirus with health systems and populations still to reach the point of maximum impact. Yet there is hope both on the medical front and in the financial markets. Policymakers will find the right mix of actions to instill confidence back into the system. We may not have reached rock bottom in the markets, but with equities now touching a fall of 25% since the start of the year they are moving ever closer to value territory. What else needs to happen to improve the position? Julian Broom, our Chief Investment Officer, shares his thoughts:
The most important development required is for the medical profession to find an effective vaccine. Unfortunately, this is probably at least 12 to 18 months away. However, it is possible that some existing drugs may prove useful in alleviating the situation in some way. A very interesting article in Der Spiegel outlines the pipeline of drugs that could at least mitigate the impact of the virus on some elements of the population. Remdesvir – which was initially developed for the treatment of Ebola – has been undergoing trials since February with results likely by late April. This treatment does have to be administered intravenously, which limits how extensively it could be used. Elsewhere, around 85 trials are ongoing on COVID-19 patients, and doctors are also trialling a combination of HIV/AIDS medications including lopinavir and ritonavir. Furthermore, a decades-old anti-malaria tablet, chloroquine, is thought to inhibit viruses penetrating the human body; the drug is currently on trial in China.
Central banks in action
Central banks have a huge job to supplement the credit facilities that support businesses. The problems are most evident in the airline industry where business has virtually ground to a halt. We expect central banks to not only keep interest rates close to zero, but increase the amount of funding available for the financial system. There are market hopes that there could be $1 trillion of liquidity from the IMF and further coordination between G7 countries.
Fiscal policy will need to move from defending a situation to the attack
We need to see a significant boost to budgetary spending. Given that governments can borrow very cheaply from the markets they have an opportunity for a massive increase in spending. Governments also have a good excuse to spend; crumbling infrastructure needs to be replaced and governments need to step up their ‘green spending’.
Gauging the growth slump
A V-shaped global economic recovery is still a pipe dream at present, but we do appreciate that many economists will still hold out hope for a rebound in the second half of 2020, which can’t be dismissed entirely.
We understand situations like we find ourselves in currently can leave investors feeling very anxious, and unsure about what to do. The best approach is to maintain your focus on your long-term goals and guard against knee jerk reactions.
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