Back to Market and Insights

Davy update to private clients - 26th March 2020

26th March, 2020

Another week into the crisis and data keeps deteriorating. We are seeing exponential growth of infection cases on a global scale. Governments are implementing policies previously considered unthinkable. Economists are building these policies into their models to produce forecasts more negative than ever seen before. We are finally beginning to see the virus impact in economic data, and it is very negative. What is an investor to do?

The Coronavirus (Covid-19)

The number of infections worldwide has risen from 100,000 last week to over 500,000 this week. The number of deaths has exceeded 20,000. The virus continues to spread across the United States, with New York and California imposing distancing policies seen in Europe, but the numbers will continue to shoot upwards. On a positive note, we have seen an inflection point in Italy – the growth rate in new infections is declining. While it is too early to conclude that Italy is turning the tide, this was the point that signalled improvement in China and South Korea.

The economic impact – how bad a recession?

The debate now is not whether we will have a recession, but how bad will it be. Assuming a total standstill, economists at the major banks are releasing progressively more alarming forecasts. Q2 estimates for US growth range from -2% to -30% on an annualised basis, or -1% to -7% for the quarter. The enormous range of forecasts is an indication of how speculative these estimates are.  For example, the higher end would be more than twice the largest recorded quarterly fall in the US.  

After last week’s record drop in China, this week we saw the composite Purchasing Manager Index (PMI) in the Eurozone fall from 52 to 31. Above 50 represents an expanding economy, below 50 a contracting one. While these are surveys and not actual activity data, a reading in the low 40s is consistent with a recession, and in the 30s with a severe recession. We await the commonly used US equivalent, the Institute for Supply Management (ISM) survey, next week to gauge the extent of the damage there. On a more optimistic note, if China is really recovering from their virus lock-down already, we may see their PMI index rebound higher next month.

The policy response

Cometh the crisis, cometh the policies. After a painful learning experience in 2008, the central banks have gone straight to the crisis playbook and beyond. They are injecting massive liquidity into the system to ensure that banks and money markets continue to function, and committing to buy trillions of dollars’ worth of bonds to keep yields super low.  This will allow governments to borrow the necessary funds to unleash the largest fiscal stimulus in history. The spending will be targeted directly at households and businesses to help them get through the sudden economic stop.  

Unfortunately jobs are already being lost and consumer spending, the largest part of most economies, is constrained to the bare basics. Adding up the opposing extremes of the virus impact and the policy response, we note that the Coronavirus could cause one of the largest global growth shocks we have seen, but also potentially the briefest.

Our investment view

Depending on the news flow, every day seems to bring either a big bounce or another drop. We expect this volatility to continue, as the virus count will continue to increase and the economic data will continue to get worse. As for when the market might bottom, this tends to happen a few months before the economic trough. By most estimates, the economy will trough in Q2, with a risk that it drags on further if containment policies fail.

As outlined in last week’s note, we try to take the longer term view in our centrally managed portfolios, and on this basis, we are taking opportunity of this extreme situation to temporarily add more equities. No one sector or company in particular, just the broad global index for now. The market could of course fall further as the virus and economic data gets worse, so we are making our additions in stages. For advisory clients, potential portfolio adjustments are discussed between the adviser and the client with relevant proposed changes in the context of the client's individual circumstances.

Share this article

Our latest insights