Strategy & economics
Watch: Markets and the economy - coronavirus update
Johanna Kyrklund - The market view
In these turbulent times I thought it would be useful to outline some of the factors we are monitoring.
Some compelling valuations, but earnings under pressure
Firstly, valuations. We entered this episode with very expensive valuations in the market and the good news is that some of the froth has been taken off the markets. Certainly, at the stock level, we are starting to see opportunities.
At the market level we are starting to price in negative earnings growth, which is a necessary adjustment given the significant demand shock we are seeing as a result of the virus. We think we are two-thirds of the way there in terms of the valuation adjustment.
Fiscal response critical
Secondly, we are looking at the response from governments. The cuts from the central banks are helpful in terms of allowing the markets to function well. But we really need to see a strong fiscal response to support individuals and businesses through this crisis.
Watching the infection rate
Finally, we are monitoring the infection rates of the coronavirus. If we were to see a peak in the infection rates in Italy that would be welcome news because it would suggest that the measures taken by Italy are effective. Also, more visibility on the outbreak in the US would help us more accurately price this crisis.
Having seen some very significant falls in the market, we expect more of a two-way action in the coming weeks. Rising and falling as markets weigh on the one hand the economic consequences of the containment measures and on the other hand governments’ responses.
So, we’ll probably see a little bit more volatility, but we are starting to see some opportunities emerge at the stock level.
Craig Botham - The economic view
The economic view
Now that the coronavirus is a pandemic and not contained specifically to China, the economic consequences are going to be more severe.
It is a fast moving situation. It is something we are constantly monitoring. But as it gets worse the pressure on any economic outlook is going to be downward.
US and Europe - behind the curve?
If you want an indication of just how bad things can get you can look at China. The most recent data was extremely negative. We have seen double-digit declines in the high frequency indicators and that was a result of the shutdowns to control the virus rather than the virus itself.
China and much of Asia are further through this virus pathway. The US and Europe are only now beginning to enact these quarantines. So, you can expect a similar hit, perhaps even greater, in those regions as time progresses.
Central banks can do more - but fiscal response key
The dividing line between recession and depression is the policy response.
Central banks have acted pretty aggressively. They are not out of ammunition yet. There is still a bit more they can do, but now fiscal policymakers have to step into the gap.
Where central banks are the lenders of last resort, governments are the spenders of last resort.
Right now they need to replace that income that is being lost by people who are losing their jobs, the result of firms not being able to earn anything anymore. If they can do that then we should be able to avoid an economic catastrophe.
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