2 December 2020

Coronavirus: economic impact and strategy to adopt

Luc Charlier

Luc Charlier


Philippe Ledent

Philippe Ledent

Expert Economist

As coronavirus impacts financial markets, discover the analysis of our experts

Stocks jump to all-time high on Biden and vaccine optimism

The MSCI World All-Country index rallied 59% (in local currencies) since end March and jumped to a record high after Pfizer & BioNTech’s and Moderna’s interim analysis showed their vaccine prevented more than 90% of Covid-19 infections - the most encouraging scientific advance so far -, and as traders pressed bets that President-Elect Joe Biden will bring steadier stewardship of the American economy. Another positive landmark for world markets arrived, one that seemed scarcely possible a few months ago. As of now, global stocks excluding the U.S. are nearly in positive territory for 2020 (in local currencies). While the U.S. market has stalled with gains for the year at 10%, the rest of the world is closing the gap!

Undaunted by some of the highest equity valuations in two decades – stocks sit at more than 27 times annual earnings, a valuation with virtually no precedent since the dot-come bubble and the resurgent coronavirus –, investors started to price in the economic benefits of a vaccine, as it will provide greater certainty that governments will not need to use lockdowns to manage the virus indefinitely.

Investors are also reassured by the election of Joe Biden. For markets, the current U.S. situation is rather ideal, even if Donald Trump has refused to accept defeat. First, it is unlikely that faced with a Republican Senate, Joe Biden will be able to pass his tax reform. In addition, and contrary to popular belief, the desire to win the mid-term elections of 2022 could see Joe Biden push a pro-growth and pro-employment program before any tax increase. With odds pointing to a divided government, investors saw hopes dashed that Congress would pass a multitrillion-dollar spending package to boost the economy. But bulls turned to the Federal Reserve and Chairman Jerome Powell, looking for continued support that has been critical to the rebound from the pandemic-fueled slowdown. Jerome Powell reassured markets that the central bank remains at the ready should Washington fail to deliver the aid package many agree is needed. And that buttressed markets that, given the choice between a broad package of economic aid and targeted Fed liquidity support, would always choose the latter due to its benefits for asset prices.

Investors started to price in the economic benefits of a vaccine, as it will provide greater certainty that governments will not need to use lockdowns to manage the virus indefinitely.

As central banks consider ultra-cheap loans are key for next stimulus, that leaves long-term investors with little choice but to choose stocks – with a preference for small caps - and corporate bonds, rather than safest sovereign bonds or cash. The estimated dividend yield on the MSCI All-Country World Index is still 1.15% higher than the average yield of the Bloomberg Barclays Investment Grade Bonds index.

There are, of course, plenty of things that could still go wrong. The vaccine needs to get to people, and the world economy needs to keep above stall speed during what could be a dark winter. Looking at the global total, the Bloomberg daily activity index tells a story of a plunge in output of about 50% in March, followed by the beginning of a rapid recovery in May which stalled at around 80% of normal activity in July. From mid-October, the data show the start of a double dip as several advanced economies fell victim to the impact of a resurgence in the rate of Covid-19 infections and second lockdowns.

The economy still needs to revive in time to save the many businesses that appear to be at risk of default. But at least some version of a positive outcome is becoming visible. The first stage, a rotation of stocks away from defensive sectors and toward those that would benefit from growth, is already under way. That is why we gave a slightly more cyclical coloring to our portfolio by focusing on industrials, IT and Healthcare at sector level and on Emerging Markets at regional level. If the latest news does lead to the successful vaccination of a large part of the world’s population by about the middle of next year, then economies might begin to benefit from pent-up demand.

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