As a research team, we are reading as much as we can about the COVID-19 virus in order to understand more about the potential economic consequences of the crisis. Following our guidance note posted on 16 March 2020, we offer some further thoughts below.
The virus itself
The Imperial College report (“Impact of non-pharmaceutical interventions (NPIs) to reduce COVID-19 mortality and healthcare demand”, published 16 March 2020) is extremely helpful in highlighting the key facts to consider and explaining strategies for handling the outbreak.
In short, the facts are:
In response, global authorities are pursuing one of the following strategies:
In the UK, the government has opted for a policy designed to slow the transmission rate, but the working assumption is that, in terms of rates of infection, this will be marathon, not a sprint. The month of May has been cited as a likely initial peak in infections, but even if this is the case, the virus will be resurgent in the autumn and winter, in the same way as normal seasonal flu.
As a result, we are witnessing an unprecedented economic dislocation which undermines revenues for all types of businesses and stops the normal circulation of money between companies and therefore to employees. A rapid rise in corporate bankruptcies and unemployment is on the cards. As such, both central banks and governments have been turbo-charging their monetary and fiscal responses.
The UK government has already committed to spending a fifth of annual GDP through a combination of loans and grants to breach this gap, with more to follow. Unlike previous crises, we are dealing with the actual solvency of the business sector and this challenge will require huge ongoing government support - think state-backed guarantees for businesses, as well as individuals.
Regardless of all these efforts, there will clearly be a loss of demand from both companies and individuals and this has serious implications for earnings in 2020, and possibly 2021. Risk assets are responding to this fear and uncertainty.
Given the scale of the economic vacuum in which the equity markets are now forced to operate, we - tentatively - offer our insights on valuations and thoughts on where we might be heading.
Building further upon this latter point, here are some valuation scenarios to consider, with thanks to the work of Real Investment Advice:
Markets only experience abrupt falls when something goes very wrong, very quickly, and the coronavirus clearly qualifies. We must not dismiss the unique challenges that it presents, but, at the same time, we can look towards an end point. New viruses are highly disruptive in the initial stages, but over time, the correct level of immunity will be established within the global population and, in all likelihood, a vaccine will be formulated.
As a final thought, as and when this crisis subsides, the world will be flooded with liquidity at a time when we are slowly returning to normality.
Peter Toogood, Chief Investment Officer, The Adviser Centre Limited and Embark Group
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