Following two days of global stock market falls on the back of the accelerated spread of COVID-19 outside of Asia, it is worth considering what comes next both for markets and the broader health of the global economy.
Today, political leaders, business leaders and central bankers need to implement a plan to the very best of their ability to control the spread of the virus and provide the economic policies to mitigate a likely economic slow-down.
We would still characterise this as a measured sell-off of equities. The day-to-day volatility is not close to the extremes seen in past major sell offs.
Although we have seen a 7% fall over the past week, over three months global equities are down only 1.1%. Global bonds continue to eke out some positive performance although high yield bonds have come under pressure.
The short-term news that is affecting the market is of course linked to the ebb and flow of the news about the spread of COVID-19. Importantly, we have yet to get the engagement of policy makers to significantly ease policy,apart from in Singapore. These measures, which will come in time, will provide some short-term relief to the markets. For the moment, governments are, of course, fully focused on fighting the spread of the virus and few have yet to announce anything meaningful. Central banks recognise that just cutting interest rates will be insufficient and banks need to maintain lines of credit. Undertaking this action will help businesses and by extension, the global economy, recover from the impact the virus is having on the global supply chain.
As we moved into this crisis, the short-term (one year) outlook for both the global economy and asset prices was good. If policy makers can get the response to the economic element of the crisis right, then given the sound economic fundamentals globally, we would expect a V shaped (rapid) recoveryThis in turn would be positive for global asset prices.
It is impossible to say what the long term impact of COVID-19 will be but we would caution against knee-jerk reactions. The old adage in our sector is that for the sensible investor “it is time in the market not timing the market” that makes for the best overall returns.
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Julian Broom, Chief Investment Officer