The sharp increase in the number of confirmed cases in Europe, the US and Australia surprised markets. Furthermore, the speed and the severity of the various non-voluntary social distancing measures announced by different governments were rather unexpected – particularly since most observers believed, as recently as seven days ago, that the Western democracies would be more hesitant in imposing such drastic measures as seen in China.
With international air traffic grinding to an almost complete halt and an increasing number of economies each initiating different lockdowns, economic growth will likely be severely impacted. While we do not necessarily have a high level of confidence in the following scenario, one baseline scenario could show:
- the global economy contracting in the March quarter
- even worse growth numbers posted in the June quarter when the economic impacts of the lockdowns will be most severe
- a reversion to a more normal level of activity in the second half of 2020.
However, as we have stressed before, forecasting is almost impossible since much is dependent on the spread of the Coronavirus, the ensuing containment measures and the speed at which the number of new cases respond to those containment measures. The experience of China suggests that the Coronavirus can be brought under control around eight weeks after restrictive “draconian” measures are implemented. However, in this case, “brought under control” does not mean the eradication of the virus, but a significant enough decline in the number of new cases such that the level of economic activity can start to normalise. Is this reliable guidance as to the path of the various Western economies? At this time, we simply don’t know.
Will we see a light at the end of the tunnel? Markets are struggling to correctly price risks in the current environment – thus, the very large price reactions of both equity and debt markets to both positive and negatives news on a daily basis. We expect this very high level of price volatility to persist over the next few weeks. The one piece of good news which we have observed over the last few days is that the massive, co-ordinated interventions by the central banks – including the Reserve Bank of Australia – seem to be providing some stabilisation to debt markets. For example, we have seen a decline in sovereign bond yields, including in Italy. This has at least delivered some diversification benefits to investors in our multi-sector funds. However, credit markets remain on the stressed side, meaning central banks may have to implement additional liquidity measures to stabilise debt markets in future.