We begin with the virus itself. Worldwide COVID-19 cases topped 860 000 as of 1 April. However, global data on cases is a function of the evolving testing strategy within and across countries as much as the spread of the virus itself, so there is a limit to what can be learned from the data.
What would be informative is a peak in the caseload within randomised samples of the population. In the absence of that, we focus on the death toll because those numbers should be less subject to measurement error, although deaths clearly lag infections by a couple of weeks.
Exhibit 1: Cumulative number of COVID-19 deaths in selected countries – lines shows total number of fatalities since the 10th death; x-axis shows number of days since the 10th death
Deaths climbed to above 42 000, as of 1 April, with Italy accounting for almost 30% of recorded global fatalities. However, there may finally be some good news there, with the number of new hospital admissions reportedly falling. This suggests we might be close to the peak of the contagion.
Setting a benchmark: North Asia
We expect all governments to learn from global best practice in the fight to contain the pandemic and from a global perspective, the North Asian economies have established the benchmark for containment. Nonetheless, we remain vigilant for a resurgence of COVID-19 cases there. Cases in South Korea are definitely on our watch list.
If countries want to be able to remove the extreme social distancing measures that have currently been deployed – if they want to learn to live with virus – a number of measures must be put in place, which define a key set of signposts:
- widespread diagnostic testing, coupled with effective contact tracing and quarantines for the sick
- continued self-isolation for the vulnerable
- increased capacity to treat the sick within the healthcare system
- and above all, a serological test that can establish acquired immunity.
On this last signpost, news from the US of the development of a test that can detect antibodies in blood to confirm current or past exposure to COVID-19 in as little as 15 minutes is particularly encouraging.
China climbs out of the trough; developed market PMIs plunge
We believe a recession is clearly a price worth paying to save lives. Survey data such as the purchasing managers’ indices (PMIs) are a key early signal of how high that price could be. In fact, the March PMI data appear show China and the advanced economies moving in opposite directions, like ships passing in the night. The Chinese NBS PMI for services activity bounced back to 51.8 from a trough of 30.1 in February, while the European services balance collapsed from 52.6 to 28.4.
Exhibit 2: Like ships passing in the night: services sector activity is bouncing back in China, while in Europe, it has just plunged sharply – graph shows purchasing managers’ indices for the non-manufacturing sector (a level of 50 or above indicates activity in the sector is expanding)
Source: Markit, Reuters, BNPP AM
First impressions are often deceiving. Just because the March PMI was a normal number, it does not mean that the Chinese economy is back to normal. The data describes how output changes from one month to the next. An abnormal number followed by a normal one suggests that the level of activity is still abnormal.
And what about households?
The financial health of the household sector will be a key focal point of our analysis throughout the pandemic. If the squeeze on disposable income and the hit to savings are too severe, if too many households enter a state of financial distress during the shutdowns, consumer spending will not bounce back as the containment measures are unwound. There will be no robust recovery in activity if this key engine of domestic demand stalls.
We are therefore monitoring signposts that speak to the state of household finances with keen interest. In the US, initial jobless claims were literally ‘off the charts’, at 3.28 million for the week ending 21 March. Consumer confidence in Europe fell sharply in March.
Exhibit 3: Consumer concerns grow as the virus spreads and containment measures deal a blow to the economy – graph shows the drop in consumer confidence as views on the general economic outlook darken and job worries spike higher (percentage change, seasonally adjusted)
Source: European Commission, BNPP AM
The economic policy response has been impressive and is essential in our view. If the losses are not socialised, the recovery from the crisis will be put in jeopardy. There must be companies and jobs to go back to once the social distancing measures are lifted.
Finance ministers around the globe are delivering. Large support packages have been announced and we expect more to come. The ink is barely dry on the USD 2 trillion US stimulus package and talk has already begun on a fresh package, focused on infrastructure spending, and potentially running to several trillion dollars.
An update on the market environment
A form of stability has returned to credit markets with the US Federal Reserve’s new primary and secondary investment-grade (IG) bond buying facility. Corporate bond and CDS risk premiums have narrowed. Moreover, the new issue market has opened, both in Europe and the US for IG bonds. High-yield risk premiums have also tightened with some inflows, but HY still trades at distressed levels.
Global equity markets have been trading with a better tone. Prices have rebounded and volatility has dropped (even as the trading range remains wide). The rebound is sector-specific as the crisis is likely to have a profound impact on the travel, tourism, entertainment and retail sectors.
While USD liquidity has remained stressed, the cost of issuance of commercial paper is prohibitively expensive, even for the better-rated corporates. Once the Fed starts buying more short-term paper in the first half of April, the pressure on funding costs should drop.
The significant central bank intervention as well as the recent fiscal packages have provided an underpinning to the global economy and put a break to the downside in markets. In our view, USD liquidity needs to improve markedly before markets can gain a sense of normality. That said, it is clear that central banks will do whatever it takes to stabilise markets. So far, this is working.
No time to sell risky assets
In summary, we remain braced for bad news in the short run. The human cost of this crisis will be hard to bear. There may have to be multiple shutdowns of society and the economy to contain the spread of the virus. But society will ultimately learn to live with the virus and the economy will recover.
Our signposts still suggest to us that this is no time to sell risky assets. We are looking for opportunities to buy.
Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients.
The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.
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