Global Macro Update March 2020
Global Macro Update March 2020
23 March, 2020
The virus that originated in Wuhan, China and now known as COVID-19 was the black swan that the global economy was always looking out for but wasn’t prepared for. The virus has hit a vulnerable global economy buoyed with too much debt, leverage and complacency.
Since the Global Financial Crisis a lot has changed and been forgotten. Although this time is entirely different the market moves have been similar in speed and breadth. The global economy is having to deal with a variety of different shocks:
- A demand shock given the almost instantaneous disturbance to consumer spending, travel and commerce.
- A supply shock as whole countries go into lock down.
- A financial shock as liquidity virtually disappears and markets tumble.
- An oil shock, which is a supply shock, from the geopolitical war being fought against the North American shale industry by Russia and Saudi Arabia.
- And, importantly, a public health shock which is not comparable to anything our generation has had to fight before.
As markets have fallen the size and synchronization of the monetary and fiscal policy response has been rapid. Everyday new stimulus has been announced with little immediate and direct market impact. What worked in 2008 is going to take a lot longer given the public health issues that still need to be accepted and then reacted to by many countries.
We are not medical or scientific experts in the complex fields of virology and epidemiology. However, it appears that as well as the bad news of countries being entirely lax and backward with regards to fighting this new threat, there are clear signs for hope in what is, so far, happening in Singapore and South Korea with regards to the fall in confirmed cases being reported.
The impact on markets has been swift and sweeping. Bonds, equities, commodities, funds, FX and digital assets have all suffered as investors sell and release cash. This is ongoing with a very uncertain time line. During March to October 2008 Gold fell 26% due solely to investors urgently wanting cash. Indeed, for the full year of 2008 Gold actually posted a positive performance.
Bear markets are notorious for seeing brutal counter rallies then selloffs so we fully expect to see the same over the course of the next few weeks. The bottom in markets could well vary across asset classes and markets will remain very quick to discount the next narrative and drive of uncertainty or certainty.
We entered the year neutrally positioned. The previous year saw stellar returns and going into a Presidential election year with US stock indices at healthy multiples we had little enthusiasm to chase markets higher. Economies were slowing, specifically the export led manufacturing hubs in Europe, however the US consumer was on a good place. In January the flare up in the Middle East saw a small wobble in markets but as quickly as it began fear diminished. We had been aware of the presence of the virus in Wuhan in mid-January having been following a similar issue last year which decimated 25% of the Chinese pig population. Out with rampant food inflation within China this came to nothing.
We began moving defensive in portfolios in February selling risk assets (stocks, corporate bonds and funds) adding cash and government bond exposure. In line with the escalation globally and the impact on markets we have continued to trim positions when they no longer fitted the risk profile we sought from the fund. Liquidity has been very challenging and some tough decisions have had to be made.
Market dynamics, the virus and the impact on economies is being monitored on a daily basis. However, there remains a lot of ‘noise’ to sift through. We hold to our view to make medium term asset allocation decisions and not to react to news flow. With liquidity absent the cost of reaction is far too high and not something we want to take for clients and ourselves.
So current positioning is very defensive within the limits of the portfolios.
As we have discussed there are five shocks which we are all having to experience. The future remains highly uncertain at least until we begin to control the virus. Monetary and fiscal stimulus will only increase. They are ultimately useless against the virus but should start to put a floor under economies and help prevent a damaging deflationary spiral. In 2008 the US electronically transferred $600 to every US national, $300 to every child. We expect something similar soon.
Markets could take some comfort from such a package especially if its big enough albeit the required size is open to debate. Government borrowing is going to expand aggressively and we will see the issuance of government bonds. With constrained demand its more than likely central banks will have to buy that debt to prevent interest rates rising too much. When the virus is actually more under control we can expect to see stocks rally hard again.
However, the extent of global stimulus we fear will continue to erode the integrity of money going forward. In this environment it’s likely that finite resources could well outperform and the benefits of gold valued a lot higher. We think we will also see a stronger move towards gold and digital assets perhaps in a new monetary system. Inflation is the obvious next step when the public health shock subsides. This would mark new investing era and something, although very early, we are beginning to examine.
In conclusion the fight against this virus will be won. The amount of global scientific resources that are being focused on a vaccine is unprecedented and it’s only a matter of time. In the meantime, we continue to monitor markets with a singular view of navigating portfolios through these turbulent times.
As a team, we wish you good health, stay safe and we will do our best to keep you up to date on markets.
Your Asset Management Team
March 23, 2020
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