Steven Bell – Macro Update 25 March 2020

The full scale of the economic impact is now being understood.

Steven Bell

Managing Director, Portfolio Manager & Chief Economist, Multi Asset Solutions

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  • New cases in France and Spain have slowed but there are signs that Spain’s healthcare system is running into serious problems as the death rate rises. New cases respond 10-15 days after lockdown and Italy is in that period now, and death rate responds after a further 17 days. Lockdowns in other countries, notably the US are generally behind Italy. The US is ramping up testing this week and we are seeing a huge jump in the number of cases.
  • There is a big development in the UK, with the government expected to roll out huge testing for antibodies in the next few days. There could be a large percentage of the population that is already immune, the social consequences of this are huge. The government plans to test all health workers and is focusing absolutely everything on preventing the NHS from being completely overwhelmed. There were 5000 ventilators at the start of the year, there are 8000 now but the NHS is still going to be forced to ration critical care, effectively deciding who lives and who dies, as is happening in Italy.
  • The full scale of the economic impact is now being understood. Tuesday’s PMI numbers have brought a dose of reality, and we have now seen analysts forecasting GDP falls of 10 to 15% for the second quarter. Corporate earnings will suffer drastic declines. The Bank of England is telling banks to retain as much capital as possible and to limit dividends, even bonuses. Alarm in the US is rising as the number of cases soar and as Thursday’s initial unemployment claim number is expected to skyrocket. Unemployment in Norway has tripled.
  • There are some positives to be taken. The virus appears to be coming under control in Asia and their economies are returning to something approaching normal. Europe should follow. Governments have taken bold actions; the US package is enormous, as is the UK’s and Germany, the home of fiscal conservatism, has also announced huge measures, well beyond what they did in the Global Financial Crisis (GFC). Central banks are playing a big role, for example through their very generous extension of quantitative easing. But some measures are causing tension between European governments; it has been suggested that Italy could become eligible for the European Stability Mechanism, which would open the way for much more assistance, but Germany is currently blocking this.
  • What does this mean for markets? Technical factors that led to forced selling in recent weeks have dissipated and institutions are now buying equities to restore allocation targets in balanced portfolios. We won’t get a smooth recovery, rallies within bear markets are common. But I believe we may have passed the lows.

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