The global economy is teetering on the brink of a historically deep recession as tens of millions of people find themselves out of work and hundreds of millions more are trapped at home as major cities from New York to Singapore implement strict measures to try to control the coronavirus pandemic.
The resulting strain on businesses spawned wild gesticulations in financial markets ” the S&P 500 plummeted as much as 34 per cent from its all-time high set nearly two months ago ” and left many investors unsure where to put their money.
Even if markets rally sharply when containment measures are lifted, the world may never be the same, requiring investors to rethink their bets on the future and companies to reconsider their business models, analysts and investment strategists said.
Companies with strong balance sheets and the ability to leverage larger economic trends, such as the introduction of 5G telecommunications, remain key, but investors need to be prepared for a dramatically different landscape when things return to normal, according to Eli Lee, the head of investment strategy at Bank of Singapore. There may be “radical shifts” in a variety of industries as the world changes how it works or consumes entertainment, he said.
“What we are doing is subjecting a major part of the global population to a completely different lifestyle. If we do this for a few months, folks are going to get used to it,” Lee said. “Depending on how long these containment measures are in place, is it long enough that economic prospects for some companies that are at risk today may continue to be irreversibly changed over the longer term.”
The coronavirus, known as SARS-CoV-2, has infected more than 1.8 million people around the globe since the first cases emerged in November. It has severely disrupted industries from airlines to car makers as fewer people are travelling and factories are closed during the health crisis.
Nearly 17 million people in the United States applied for unemployment insurance in the past three weeks ” the highest on record and far outpacing the amount of people out of work during the global financial crisis.
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The International Monetary Fund, which is expected to unveil its latest world economic outlook on Tuesday, said last week that it forecasts a global recession as bad or worse than the global financial crisis in 2008.
Karen Dynan, a senior fellow at the Peterson Institute for International Economics and former chief economist at the US Treasury Department under President Barack Obama, said the shutdowns, while gaining traction in slowing the spread of the virus, are causing an “unprecedented drop” in consumer demand for services, sharply slowing production and causing knock-on effects, such as liquidity crises and declines in asset prices.
“For the global economy, we’re looking at a slump this year that is considerably sharper than the global financial crisis, but also significant recovery that begins in the second half of this year and produces sizeable growth numbers for next year,” Dynan said on a webcast on Friday.
The non-partisan think tank is forecasting global gross domestic product to contract by 3.4 per cent this year, with the US economy shrinking by 8 per cent. China, which resumed production in recent weeks after aggressive quarantine and lockdown measures, is expected to grow at 1.5 per cent ” its slowest pace in 44 years.
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However, the Peterson Institute sees global growth snapping back to 7.2 per cent next year, with sharp upturns in both the US and China in 2021.
Stock prices have moved wildly this year as uncertainty over the severity of the virus and the length of potential shutdowns has weighed on valuations. The Hang Seng Index has declined 13 per cent since January 24, the last day of trading before the Lunar New Year Holiday, but the benchmark recovered from lows last month, where it fell as much as 22 per cent.
The S&P 500 dropped sharply as the intensity of the pandemic worsened in March, but also recovered from its lows. As of Thursday’s close, the index was down 18 per cent from its all-time high set on February 19.
Robert Secker, equities investment director at M&G Investments, said it is “still too early” to understand what the ultimate effect on economic activity and corporate earnings will be, but stimulus policies by central banks and governments are providing a buffer against the slowdown.
“To a large degree, the performance of equity markets going forward will be a function of sentiment towards the 2021 earnings outlook rather than the widely expected fall in profits over the next couple of quarters,” Secker said in a markets review on April 7.
US President Donald Trump has grown increasingly impatient for the American economy to reopen, previously suggesting the US could ease social distancing restrictions by early May and saying last week it would be “the biggest decision I’ve ever had to make”. Some health officials have cautioned against reopening the US and other economies too quickly.
Several countries, including Japan and Singapore, believed they had the outbreak under control, only to have to take more aggressive measures to rein in the virus in recent weeks. Japan declared a state of emergency on April 7.
For now, large swathes of the world’s biggest economies ” namely the services sector ” are struggling as global consumption remains weak.
Retail sales fell a record 20.5 per cent in the first two months of the year in China and probably contracted by a further 6 per cent in March, according to China Renaissance.
Bruce Pang, China Renaissance’s head of macro and strategy research, said online shopping may account for a larger portion of sales post the pandemic in China, but job losses and lower income may weigh on domestic demand for a time. The investment bank expects retails sales to rebound beginning in the second quarter.
“Consumers could be more restrained in their spending habits, deciding to save more and spend less from their incomes, which could lead to a big change in consumers’ capacity, willingness and habits around spending,” Pang said in a research report on Thursday.
The pandemic also is raising questions about whether more employees will be asked to work from home on a more permanent basis and how companies will design their offices, including rethinking open workspaces and less shared seating to slow the spread of outbreaks among colleagues.
And, it could further strengthen the resistance to globalisation and rise of protectionism in recent years that was personified in the US-China trade war, Steen Jakobsen, chief investment officer at Saxo Bank, said the pandemic. It could be well into 2021, if not 2022 before the world economy normalises, he said.
“The world will never come back to where it was before Q1 this year,” Jakobsen said. “We will have a new world order.”
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