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Market Comments


There continues to be a huge commentary understandably on the effects of the Coronavirus. Within most of this there is little new. Some key points to watch are:

Liquidity issues for corporate and individuals both in terms of forced selling in markets to meet margin calls/risk controls or paying wages/bills/financial obligations. Tensions in a number of asset classes (government bonds, corporate credit, currencies and equities all saw hugely higher dealing spreads) surfaced this week partly resulting from a scramble to buy offshore US$ presumably to meet obligations which resulted in a rush to sell anything that could be sold for short periods.

A number of leaders have said governments globally need to be on a war time footing and prepared to do whatever it takes. The policy of containment adopted by most governments in the West to ‘flatten the curve’ in the short-term steepens the economic or recessionary curve. As containment makes the immediate downturn sharper (much sharper initially than the GFC) government have to step in with fiscal support to prevent an economic crisis by saving businesses from going under. This will involve cash grants to both business and corporates to maintain confidence. This can be thought of as keeping as many plates spinning as possible and catching those which fall before they break. It is necessary to ensure that whilst corporates have a liquidity crisis this does not translate into a solvency crisis which results in mass unemployment on permanent scale. Many governments (UK Australia, New Zealand to name three) are now committing to expenditure of around 15% of GDP and these sums are necessary and affordable as a one off.

Measures need to be viewed in the market as sufficient to hold the economic line. If investors can see across the valley to the other side some signs of market confidence are likely to emerge. As yet this isn’t present for markets and there is opacity on earnings numbers which are discouraging long term institutions from committing cash to the market. A further factor holding back institutional investment is liquidity factors in the form of outflows or a fear of outflows and therefore having some cash buffer to meet redemptions. A combination of very supportive fiscal measures which convinces markets that support is there to prevent a recession turning into a depression, combined with indications that peak infection levels in the developed world especially the US have passed (in other words containment is working) could see markets looking more reassured in a couple of months time. Where the exact bottom in markets is of course impossible to tell and news flow such as stimulus packages and new infection/death rates will drive markets in the short run as there is absolutely no visibility on company profitability in the near term and as yet no certainty that 2021 will see a marked improvement for corporates over 2020.

G O’Neill 20.03.20