13 May 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

Watch the analysis of Ruben Smets.

Strong downward pressure on earnings
  • Last weeks turned out to be great for risk markets. Roughly half of the market value lost during the Covid-19 crisis has been recouped. At its highest point, the MSCI World All Country index was up 27% (in euro) to 490 compared with a closing low of 384 on March 23. Could the bottom be in, and a new bull market already be underway?
  • First, we should bear in mind that markets tend to move around a lot after a shock, and it would be surprising if we didn’t have another big move ahead. The 2008 bear market had a number of false starts, with the MSCI World AC index rallying about 14% (in euro) between late October and early November, and 11% between late November and early January, before tumbling again by about 18% before finally bottoming at a 13-year low in March 2009. 
  • When it comes to the pandemic management, it is true that the number of new virus cases appears to be peaking globally, but the bad news is that the improvement is probably a direct consequence of social distancing and the plunge in economic activity, and could reverse quickly if people just went back to work. It underscores the massive task for policy makers, who must deliver enough coordinated stimulus to drive the rebound but avoid reopening their economies too soon and allowing the virus to return. The dilemma for authorities is the longer the (full and partial) lockdown – which now concerns almost 65% of the world's population across 98 countries – lasts, the more people lose jobs and stop spending, and the longer a return to normal economic behavior will take! 
  • Forward earnings estimates for the MSCI World AC index have dropped 28% since the beginning of the year to -20%. It is certain that further cuts to profit estimates will continue to weigh on markets. During the last five big recessions, global earnings per share fell 34% on average…
  • The oil situation illustrates just why the pandemic is hitting the global economy so hard and so deeply – even with unprecedented levels of monetary and fiscal stimulus, gross domestic product is unlikely to return to its pre-crisis trend until at least 2022. OPEC’s efforts (a cut of 9.7 million barrels) to support the market appear futile. Saudi Arabia and Russia’s agreed reductions fall short of bringing balance to the market amid a plunge in demand, as demonstrated by the huge “contango”!
  • As almost no company executive will be able to make a forecast with any degree of confidence, the new earnings season will be one of the rare ones where there will be less focus on things like revenue, cash flow and net income, and more on things such as debt, debt maturities and interest-coverage ratios. What investors will want to know is whether companies have a strong enough balance sheet to ride out the pandemic. 
  • What has been notable about this year’s slump in equity markets is that the sell-off has been less pronounced for stocks with strong balance sheet. In Europe and in the U.S., they have outperformed by about 20% (in euro) stocks with weak balance sheet. As cheap money has given companies incentive to lever up, non-financial corporate debt has surged more than 70% since 2007 to $74 trillion, or almost 92% of GDP, according to the Institute of International Finance. It is possible the pandemic will convince companies that having a strong balance sheet is important again…

Therefore, we keep our cautious stance on risk assets and we continue to focus on the most resilient stocks, i.e. stocks of least indebted companies, which are mainly found, in terms of investment styles, among quality stocks, low-volatility stocks and growth stocks, and, in terms of sectors, among healthcare, consumer staples and information technology. 

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