The day after tomorrow

March 20, 2020

While not trying to be epidemiologists, we should take note that the asymptomatic proportion (the percentage of people carrying and potentially spreading the virus without demonstrating any symptoms) means it’s impossible to separate the sick from the healthy. As many people are probably walking around not knowing that they are carrying the virus and potentially spreading it, social distancing and confinement are a must, facing the limited capacity of testing everyone on a regular basis and the emergency to “flatten the curve” as a way to adjust to health system infrastructures. In essence, civil obedience to confinement is a must. Everyone should act as if they are already infected.

Without any doubt, news on the pandemic will get worse. But our capacity to absorb or its ability to shock us will also diminish. Bad news fatigue will set in. This simply means that the current volatility observed on financial markets will not stay at these levels for eternity.

With a large proportion of economic activity having halted, the global economy will face a significant contraction. The real GDP of the world for Q2 2020, will be one of the worst quarters in history. But it’s also reasonable to believe that we will make up for lost ground in the economy. Whether the trajectory will be a V-shape or a U-shape[1], will depend on the length of the shock and the adequacy of economic policies.

Central Banks, governments and regulators have already fired a bazooka at the coronavirus. Public policies to counter the epidemic, to mitigate the fall in income and to counteract rising financial fragilities are announced on a daily basis all around the world. Stronger and harder measures should further be expected. Public authorities do not have any other alternative than to act, as this is the worst case we have ever seen.

We will see a turn in infection data. This would not be enough to stop the massive economic contraction in Q2 but this will not be the end of economic prosperity. An economic recovery will follow.

Equity markets currently reflect an environment that is worse that that of 2008 when looking at corporate profit expectations. Investor psychology is now reaching a depression level; whatever the measures announced are, participants believe that nothing can help. We should not forget that equity markets will turn before it’s over, before data starts to improve. The knee-jerk reaction to sell and to panic, will later be deemed as a mistake by investors. But on the other hand, current volatility makes any attempt at bottom fishing a desperate Russian roulette exercise.

Keep in mind that when stocks decline, they become more dangerous in the short-run but more attractive over the long-run. For sure, 2020 will be remembered as being embroiled in crisis and earnings will decline. But when looking at market valuations, one must ask oneself ‘What do some quarters or a year weigh in the grand scheme of things?’ Probably not much.

There will certainly be traumatic effects for all those who have suffered from this crisis. But there will also be people who will have a certain positive perspective, observing that the crisis was also a time when we were more detached from material things, that the real luxury is no longer money but time. Sounds like a world burn-out, in which we are reacquainted with the limits of mother nature and planet earth.

Some are wondering why stock exchanges don’t just close. If people are confined, why should exchanges stay open? For sure financial markets are currently depressing peoples’ sentiment further with the constant news flow about dropping values. In history, stock exchange closures have happened. This was in fact one of the initiatives taken by Chinese authorities at the start of 2020. Nevertheless, as recently commented by Robert Ophèle, President of the AMF (the French regulator), “it is not by breaking the thermometer that you bring done the fever”. To be efficient, any effort would have to be taken in a coordinated and global manner. Furthermore, another risk of such a closure is clearly a transfer of flows towards unregulated markets. The best advice for private individuals is probably to switch off financial information platforms or to implement some kind of financial distance to market turbulences.

To conclude with a positive perspective: stay convinced that we will return to restaurants, theaters and cinemas on the day after tomorrow. We will have learned certain lessons. We will probably work and travel differently, but the cogs of the economic machine will turn once again.

[1]  V-shaped recovery: A displacement of output, but growth eventually rebounds. In this scenario, annual growth rates could fully absorb the shock. U-shaped recovery : This scenario is the ugly sibling of the V — the shock persists, and while the initial growth path is resumed, there is some permanent loss of output.

Author: Group Investment Office