The IMF’s latest forecast for global GDP growth of 5.8% in 2021 will depend on the effectiveness of government economic stimulus packages.
Source: Wordwide; EDIC via Statista 2020. January 1 to April 2, 2020.
As discussed before, we are looking to see a plateau and then a decline in new cases because that would be the indicator that we are gaining control over COVID-19 and a turning point for countries to start to re-energise their economies. The above chart from The European Centre for Disease Prevention and Control1 shows how these numbers have been progressing by region.
Clearly North America has now caught up with Europe in terms of reporting new cases. Both regions are now well beyond the peak seen in Asia, with the United States in particular reporting alarming rates of contagion, now accounting for nearly a third of all cases worldwide. In both regions, the measures taken to control the pandemic were too late and insufficient. The situation in the US is particularly worrisome, given the fragmented state governments’ reaction to the pandemic and the absence of consistency on a national level. We continue to monitor the development of these numbers.
As of April 8th, Europe reported 32,730 new daily cases, North America 32,487 and the Middle East 3,657. South America is showing a significant expansion at 3,085 new cases, while Oceania is reporting a significant decline with 146 new cases. As of April 14th, the rate of growth in new cases in China has risen again to 79 cases that appear to be imported and in South Korea to 25. Taiwan, which has proved extremely effective at dealing with the pandemic has reported a total of 393 cases, with 5 new cases in the last 24 hours. The countries that are perhaps only now grabbing headlines include India, where in spite of suboptimal testing infrastructure reported 1,200 cases on April 14th to bring the country’s total so far to 11,487 and Russia which appears to finally be addressing the problem openly, reporting 3,388 new cases on this day, to 24,490 – this is a big increase. (Country specific numbers for April 14th sourced from Johns Hopkins University2) The UK is only now starting to account for those who did not die in hospitals and the Office of National Statistics (ONS) has announced relevant but two-week old numbers that imply an understatement of the country’s COVID-19 related deaths by around 11%3.
Economic Activity (Kim Catechis, Head of Investment Strategy)
In the midst of a public health crisis, governments, chief medical officers and investors are now trying to identify the right time to start to solve the obvious conundrum – prioritise healthcare security and absorb the economic damage or try to walk a fine line between doing ‘the necessary’ on both. Unfortunately, most governments have lost the initiative mere weeks into this pandemic. It serves no purpose now to try to keep the economy going and the population circulating – it would result in a faster and wider spread of infections, increased absenteeism and lower productivity, not mention increased healthcare, human and economic costs.
In some quarters this does not yet seem to be the consensus view, so the resultant debate slows down response times and adds to the severity and duration of both the pandemic and the recession.
Roberto Azevedo, the Director-General of the World Trade Organisation (WTO), speaking on Friday , forecast a decline in merchandise trade of 13% or of up to 32%, depending on the efficiency and decisiveness of global governments in dealing with COVID-19 and relaunching their economies. To put that into perspective, the global financial crisis of 2008 triggered a 13% decline in world trade. Even with stimulus packages in excess of 5% of global GDP (as mentioned in last week’s edition), that is a mountain to climb.
Big Picture Analysis (Reece Birtles, Martin Currie Australia's Chief Investment Officer)
How the situation progresses in Australia will be very dependent on how the COVID-19 curve flattening pans out, and the implications of social distancing on economic activity.
The Australian Government has provided significant support to businesses and consumers through this difficult time, and Australia looks to be in a much stronger position than many countries around the world.
We are however in a situation that is very unusual, where in order to reduce the transmission of the disease, social distancing has seen activity levels in the economy down something like 70%, and so this creates effectivity a revenue stop for many companies.
But this is an evolving situation. Case numbers in Australia look very much under control with new cases per day at quite limited levels now, and we would expect that there will begin to be less social distancing required, which will allow the economy and businesses to recover over the rest of the year. We might also expect that won’t necessarily be the same in all countries, internationally and international travel is likely to be limited for quite a while. Australia, being a big island, has some advantages in this environment, but the shutdown is having a significant impact on the profitability of companies.
We are not going to stay in this situation forever, and as that situation improves companies are going to recover. We think that it’s likely that the market bottom has already passed at a broad market aggregate level, but there will be significant volatility from different stocks going forward and how they respond to the COVID-19 situation. In that sense we think the worst has most likely passed for equity markets.
Outlook & Investment Strategy
Kim Catechis, Head of Investment Strategy
The IMF has published its April 2020 World Economic Outlook and sets out a base case for the world economy, assuming a -3% GDP for this year and a rebound to +5.8% in 2021. The provisos are that COVID-19 is controlled and the various government economic stimulus packages are effective.
Source: International Monetary Fund. World Economic Outlook April 2020. Forecasts are inherently limited and should not be relied upon as indicators of actual or future performance. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.
In the Developed world, there is little variation between countries for 2020. In the Emerging world, the best placed are China (+1.2%) and India (+1.9%). The worst placed countries in Emerging Markets (EM) are Mexico (-6.6%) and South Africa (-5.8%). At this point I’m inclined to see this scenario as a positive one, with a typical ‘V’ recovery in short order, although I’m a little sceptical on India, given that we are still very early in the crisis to tell how government policies play out.
Meanwhile, the energy sector continues to struggle. After a face-off between Saudi Arabia and Russia (both of whom resent US shale oil companies’ free ride on the back of their cuts, Brent dropped to close to $20/barrel, Saudi increased production by 2.5 million barrels per day (mbpd) and offered $6 to $8/barrel discounts for April delivery. Around 60% of US non-investment grade debt payable by 2021 is with shale companies, employing thousands in an election year. Even the big players are hurting, and the banks have been trying to wind in their exposure. April 14th a deal with OPEC+ to reduce production by 9.7mbpd (roughly 10%) starting May 1st caused a short-term bounce in Brent. In fact, the reduction in demand from COVID-19 related demand collapse is estimated by OPEC at 20mbpd. In any case, the agreed production cuts depend on the US shale companies, many with over $60/barrel breakeven, will go out of business, for the OPEC producers to maintain discipline. In the meantime, there are not enough oil storage units to hold the oil that is coming onstream in Q2. And China cannot ride to the rescue this time.
1 Source: Statistia, @ECDC [205-2019] https://www.ecdc.europa.eu/en/publications-data/download-todays-data-geographic-distribution-covid-19-cases-worldwide.
2 copyright 2020 Johns Hopkins University https://coronavirus.jhu.edu/map.html.
3 BBC News https://www.bbc.co.uk/news/uk-52275823.
COVID-19 is the World Health Organization's official designation of the current coronavirus disease.
Developed markets (DM) refers to countries that have sound, well-established economies and are therefore thought to offer safer, more stable investment opportunities than developing markets.
Emerging markets (EM) are nations with social or business activity in the process of rapid growth and industrialization. These nations are sometimes also referred to as developing or less developed countries.
Gross Domestic Product (“GDP”) is an economic statistic which measures the market value of all final goods and services produced within a country in a given period of time.
The International Monetary Fund (IMF) is an international organization of various member countries, established to promote international monetary cooperation, exchange stability, and orderly exchange arrangements.
Non-investment grade bonds, also called high yield, or below-investment grade bonds are those with a credit quality rating of BB or below.
The Organization of the Petroleum Exporting Countries (OPEC) is a permanent intergovernmental organization of 12 oil-exporting developing nations that coordinates and unifies the petroleum policies of its member countries.
OPEC+ includes the 11 OPEC members and 10 non-OPEC nations.
Shale oil is an unconventional oil produced from oil shale rock fragments by pyrolysis, hydrogenation, or thermal dissolution.
The World Trade Organization (WTO) is an intergovernmental organization which regulates international trade.