30 June 2020
Coronavirus: economic impact and strategy to adopt
As coronavirus impacts financial markets, discover the analysis of our experts
Ruben Smets, investment expert, explains the situation
Financial repression 2.0: fast & furious!
Since the second half of March, investors have embraced risk as signs of a nadir in the global recession have emerged after governments and central banks have moved in tandem to continue flooding lenders, markets and companies with cheap credit at an unprecedented pace (more than $9 trillion). The fastest stock market collapse on record (-34% in euro and in nearly one month) has been followed by the fastest recovery (+35%) ! Global equities have climbed back to levels last seen in February, when the coronavirus began spreading rapidly outside of China, and markets have gone from recession to depression to recovery to euphoria in less than 100 days!
In some respects, it is almost as if the pandemic never happened! It is therefore very likely that risk aversion will reappear in the second half of the year and volatility will return to the financial markets. In the context of such an enormous gush of liquidity - growth in M2, a broad measure of money supply, is the strongest in the U.S. (23%) since the Federal Reserve’s records began in 1960 - it is clear that there was immense pressure on share prices to rise. But that doesn’t banish the fear that the rally cannot be sustained once the market has to confront underlying economic and corporate fundamentals. Surveys show little sign that people are ready to splurge just yet amid spiraling unemployment and the threat of a second wave of infections. Furthermore, the failure of companies to beat earnings forecasts highlights the constraint they were facing during the pandemic, a challenge that is likely to continue into the next reporting period. The most recent consensus calls for a decline of 25% of global earnings per share in 2020!
In this environment, the risk behavior, induced in large part by the financial repression of central banks, which keep bond yields as low as possible, is too exuberant. Investors can of course ignore the very high levels of excess volatility of equities relative to bonds if they want to, but it will be surprising to get through the summer without a retracement in equities. That is why we are still staying away from high-yield credit and higher-risk equities. In a slow growth environment, it is better to stick with equities and bonds of companies that can provide strong earnings and that win from structural changes that the pandemic has brought to people’s lives.
- On the equity market, these companies are mainly found, in terms of investment styles, among quality stocks and growth stocks, and, in terms of sectors, among healthcare, consumer staples and information technology.
- On the bond market, it is preferable to give priority to investment-grade bonds (sovereign and corporate) as financing costs still support companies with sound financial records to tap the debt market.
- Finally, on the commodity market, gold is more and more seen as an alternative to riskier assets and a hedge against financial markets instability.
Read our previous studies dedicated to the coronavirus' impact on the financial markets:
- Study published on 13 May 2020
- Study published on 9 April 2020
- Study published on 26 March 2020
- Study published on 19 March 2020
- Study published on 13 March 2020
- Study published on 10 March 2020
- Study published on 4 March 2020
- Study published on 26 February 2020
- Study published on 6 February 2020 (in French)